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Chapter 15: Question 23Q (page 810)

Describe the accounting entry for a stock dividend, if any. Describe the accounting entry for a stock split, if any.

Short Answer

Expert verified

The journal entry to record the declaration of the dividend includes a debit to retained earnings (a stockholders' equity account) and a credit to cash dividendspayable.

Step by step solution

01

Meaning of Stock Dividend

A stock dividend is an increase in the number of shares issued by a firm, with the new shares being distributed to current owners.

Existing shareholders are paid a pro-rata share of these new shares. These are usually paid infractions and per share.

02

Meaning of Stock Split

When a corporation splits its stock, it raises the number of outstanding sharesto increase its liquidity.

Although the number of outstanding shares grows by a certain multiple, the share price falls in proportion to that multiple because the firm is not more valuable due to the split.

03

Describing Accounting Entry for Stock Dividend and Stock Split

When a stock dividend is paid, an amount equal to the fair value of each share (if the dividend is less than 20-25 percent)or the par value of each share is transferred from retained earnings to paid-in capital (if the dividend is greater than 20-25 percent).

A stock split does not necessitate formal journal entries, but a remark in the ledger accounts to show that the par value of the shares has changed would be useful.

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Most popular questions from this chapter

List possible sources of additional paid-in capital.

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred Stock 200,000

Paid-in Capital in Excess of Par—Common Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50¢

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2018. Show all supporting computations.

What are the principal considerations of a board of directors in making decisions involving dividend declarations? Discuss briefly.

(Preferred Dividends) Matt Schmidt Company’s ledger shows the following balances on December 31, 2017.

7% Preferred stock—\(10 par value, outstanding 20,000 shares \) 200,000

Common stock—\(100 par value, outstanding 30,000 shares 3,000,000

Retained earnings 630,000

Instructions

Assuming that the directors decide to declare total dividends in the amount of \)366,000, determine how much each class of stock should receive under each of the conditions stated below. One year’s dividends are in arrears on the preferred stock.

  1. The preferred stock is cumulative and fully participating.
  2. The preferred stock is noncumulative and nonparticipating.
  3. The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.

Lindsey Hunter Corporation is authorized to issue 50,000 shares of \(5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.

  1. Issued 5,000 shares of stock at \)45 per share, less costs related to the issuance of the stock totaling \(7,000.
  2. Issued 1,000 shares of stock for land appraised at \)50,000. The stock was actively traded on a national stock exchange at approximately \(46 per share on the date of issuance.
  3. Purchased 500 shares of treasury stock at \)43 per share. The treasury shares purchased were issued in 2013 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry to record item 2.
  3. Prepare the journal entry to record item 3 using the cost method.
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