Question

(Dividends and Splits) Myers Company provides you with the following condensed balance sheet information.

Asset

Current assets \(40,000

Equipment (net) 250,000

Intangibles 60,000

Total assets \)410,000

Liabilities and Stockholders’ Equity

Current and long-term liabilities \(100,000

Stockholders’ equity

Common stock (\)5 par) \( 20,000

Paid-in capital in excess of par 110,000

Retained earnings 180,000 310,000

Total liabilities and stockholders’ equity \)410,000

Instructions

For each of the following transactions, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.)

1. Myers declares and pays a \(0.50 per share cash dividend.
2. Myers declares and issues a 10% stock dividend when the market price of the stock is \)14 per share.
3. Myers declares and issues a 30% stock dividend when the market price of the stock is \(15 per share.
4. Myers declares and distributes a property dividend. Myers gives one share of its equity investment (ABC stock) for every two shares of Myers Company stock held. Myers owns 10,000 shares of ABC. ABC is selling for \)10 per share on the date the property dividend is declared.
5. Myers declares a 2-for-1 stock split and issues new shares.

Short answer

Transaction	Effect on stockholders’ Equity
(a)	Decreases by $2,000
(d)	Decreases by $12,000

The rest of the transaction shows no effect on Stockholders’ equity

Step-by-step solution

Meaning of Shareholders’ Equity

Shareholders' equity represents the total net worth of a company. This can be calculated by subtracting all liabilities from total assets. Shareholders' equity is also represented as the owner of the company.

Explaining the impact assuming Myers Co. declares and pays a $0.50 per share cash dividend.

1) Total Assets-decrease $2,000

Working note:-

$$\begin{gathered} \mathrm{Total}\mathrm{Asset}=\frac{\mathrm{Common}\mathrm{stock}}{\$\mathrm{Par}\mathrm{value}}\times \mathrm{Per}\mathrm{share}\mathrm{dividend} \\ =\frac{2,000}{5}\times \$0·50 \\ =\$2,000 \end{gathered}$$

2) There is no effect on common stock

3) Paid-in capital in excess of par also showed no effect

4) The retained earnings decreases by $2,000

5) Assuming the effect of transaction, shareholders equity also decreases by $2,000

Explaining the transaction when Myers declares and issues a 10% stock dividend when the market price of the stock is $14

1) There is no effect on the total asset

2) Common stock increases by $2,000

Working Notes:-

$$\begin{gathered} \mathrm{Common}\mathrm{share}=\left[\left(\mathrm{Common}\mathrm{shares}\times \mathrm{Rate}\mathrm{of}\mathrm{dividend}\right)\times \mathrm{Per}\mathrm{value}\mathrm{share}\right] \\ =\left[\left(4,000\times 10\%\right)\times \$5\right] \\ =\left[400\times \$5\right] \\ =2,000 \end{gathered}$$

3) Paid-in capital in excess of par increases by $3,600

Working Notes:-

$$\begin{gathered} \mathrm{Paid}-\mathrm{in}\mathrm{capital}=\left(\mathrm{Shares}\times \mathrm{Per}\mathrm{value}\mathrm{stock}\right)-\mathrm{Total}\mathrm{Asset} \\ =\left(400\times \$14\right)-2,000 \\ =5,600-2,000 \\ =3,000 \end{gathered}$$

4) Retained earnings decrease by $5,600

Working Notes:-

$$\begin{gathered} \mathrm{Retained}\mathrm{earnings}=\mathrm{Share}\times \mathrm{Per}\mathrm{value}\mathrm{stock} \\ =400\times \$14 \\ =5,600 \end{gathered}$$

5) There is no effect determined in shareholders’ equity

Explaining the transaction when Myers declares and issues a 30% stock dividend when the market price of the stock is $15 per share.

1) There is no effect on total asset

2) Common stock increases by $6,000

Working Notes:-

$$\begin{gathered} \mathrm{Common}\mathrm{stock}=\left(\mathrm{Shares}\times \mathrm{Stock}\mathrm{dividend}\mathrm{rate}\right)\times \mathrm{Per}\mathrm{value}\mathrm{book} \\ =\left(4,000\times 30\%\right)\times \$5 \\ =\left(4,000\times \frac{30}{100}\right)\times \$5 \\ =1,200\times \$5 \\ =6,000 \end{gathered}$$

3) There is no effect in paid-in capital in excess of par.

4) Retained earnings decrease by $6,000

5) Total stockholders’ equity shows no effect.

Explaining the transaction when Myers declares and distributes a property dividend.

1) Total assets-decrease by $12,000

Working Note:-

$$\begin{gathered} \mathrm{Total}\mathrm{asset}=\mathrm{Shares}\times \mathrm{per}\mathrm{value} \\ =2,000\times \$6 \\ =12,000 \end{gathered}$$

2) There is no effect on common stock

3) There is also no effect in paid-in capital in excess of par

4) Retained earnings decrease by $12,000

Working notes:-

$$\begin{gathered} \mathrm{Retained}\mathrm{Earnings}=\mathrm{Dividend}-\mathrm{Gain} \\ =20,000-\$8,000 \\ =12,000 \end{gathered}$$

5) Total Stockholders’ equity decreases by $12,000

Note:-

The journal entries made for the previous transaction are:

Date	Particular	Debit ($)	Credit ($)
	Equity Investments $\left[\left(\$10-\$6\right)\times 2,000\right]$	8,000
	Unrealized Holding Gain or Loss -Income		8,000
	To record increase in value of securities to be issued

To record increase in value of securities to be issued

Date	Particular	Debit ($)	Credit ($)
	Retained Earnings$\left(\$10\times 2,000\right)$	20,000
	Equity Investments		20,000
	To record the distribution of a property dividend

Explaining transaction when Myers declares a 2-for-1 stock split

1) Total assets have no effect

2) There is no effect on common stock

3) There is also no effect on paid-in capital in excess of par

4) There is no effect on retained earnings

5) Total shareholders’ have no effect.