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Chapter 13: Q16RQ (page 707)

What is the effect on the accounting equation when a stock dividend is declared?

What is the effect on the accounting equation when a stock dividend is distributed?

Short Answer

Expert verified

Retained earnings

Common stock

Paid-in capital in excess of par

Stock dividend declared

No effect

No effect

No effect

Stock dividend distributed

Small Stock dividend

Decreases

Increases

Increases

Large stock dividend

Decreases

Increases

No effect

Step by step solution

01

Introduction to topic

A stock dividend, a method utilized by corporate to distribute wealth to stockholders, is a dividend payment made in the form of shares instead than cash.

02

Effect of stock dividend declared and distribution on accounting equation

When a stock dividend is declared it does not create a liability as there is no change to the accounting equation. The creation of stockholders' equity does, however, changes. After dividend distribution, the accounting equation remains the same, but the stockholder's equity will just be arranged again.

For a small stock dividend:

Retained earnings decrease and Common stock with Paid-in capital in excess of par increase.

For a large stock dividend:

Retained earnings decrease and Common stock increases.

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Most popular questions from this chapter

On January 3, Halsall Corporation purchased 2,000 shares of the company’s \(2 par value common stock as treasury stock, paying cash of \)8 per share. On January 30, Halsall sold 1,200 shares of the treasury stock for cash of $10 per share. Journalize these transactions.

Question: Copperhead Trust has the following classes of stock:

Preferred Stock—6%, \(12 par value; 8,500 shares authorized, 7,000 shares issued and outstanding

Common Stock—\)0.10 par value; 2,100,000 shares authorized, 1,400,000 shares issued and outstanding

Requirements

2. Assume the preferred stock is cumulative and Copperhead passed the preferred dividend in 2016 and 2017. In 2018, the company declares cash dividends of $46,000. How much of the dividend goes to preferred stockholders? How much goes to common stockholders?

Where and how is treasury stock reported on the balance sheet?

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

e. Exposure to double taxation is evident.

Question: Dividing cash dividends between preferred and common stock

Copperhead Trust has the following classes of stock:

Preferred Stock—6%, \(12 par value; 8,500 shares authorized, 7,000 shares issued and outstanding

Common Stock—\)0.10 par value; 2,100,000 shares authorized, 1,400,000 shares issued and outstanding

Requirements

1. Copperhead declares cash dividends of $44,000 for 2018. How much of the dividends goes to preferred stockholders? How much goes to common stockholders?
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