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Chapter 15: Q14E. (page 815)

(Entries for Stock Dividends and Stock Splits) The stockholders’ equity accounts of G.K. Chesterton Company have the following balances on December 31, 2017.

Common stock, \(10 par, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par—common stock 1,200,000

Retained earnings 5,600,000

Shares of G.K. Chesterton Company stock are currently selling on the Midwest Stock Exchange at $37.

Instructions

Prepare the appropriate journal entries for each of the following cases.

  1. A stock dividend of 5% is declared and issued.
  2. A stock dividend of 100% is declared and issued.
  3. A 2-for-1 stock split is declared and issued.

Short Answer

Expert verified

In the first case, the total Common Stock Dividend Distributable is $150,000,and in the second, it is $3,000,000.

Step by step solution

01

Meaning of Stock Dividend

Stock dividends are shares of stock given to shareholders as dividend payments rather than cash. A company issues stock dividends in the place of cash dividends when it has little liquid cash on hand

02

Preparing Journal Entries

S.no.

Particular

Folio

Debit $

Credit $

(a)

Retained Earnings

555,000

Common Stock Dividend

Distribution Distributable

150,000

Paid-in Capital in Excess of Par-Common

Stock

405,000

To record issue of stock.

Common Stock Dividend Distributable

150,000

Common Stock

150,000

To record the distribution of common stock.

(b)

Retained Earnings

3,000,000

Common Stock Dividend Distributable

3,000,000

To record the issue of dividends.

Common Stock Dividend Distributable

3,000,000

Common Stock

3,000,000

To record the distribution of dividends.

03

Explaining the situation when a 2-for-1 stock split is declared and issued.

On no entry, the par value becomes $5, and the number of shares outstanding increases to 600,000.

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Most popular questions from this chapter

(Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.

Instructions

  1. What general rule should be applied to determine the amount at which the land should be recorded?
  2. Under what circumstances should this transaction be recorded at the fair value of the land?
  3. Under what circumstances should this transaction be recorded at the fair value of the stock issued?
  4. Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.

Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.

  1. What is meant by a stock split effected in the form of a dividend?
  2. From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
  3. How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?

(Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling \(4,200,000.

Jana Kingston Co.

Current liabilities

\) 300,000

Long-term debt, 10%

1,200,000

Common stock (\(20 par)

2,000,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

Mary Ann Benson Co.

Current liabilities

\) 600,000

Common stock (\(20 par)

2,900,000

Retained earnings (Cash dividends, \)328,000)

700,000

\(4,200,000

For the year, each company has earned the same income before interest and taxes.

Jana Kingston Co.

Mary Ann Benson Co.

Income before interest and taxes

\)1,200,000

\(1,200,000

Interest expense

120,000

0

1,080,000

1,200,000

Income taxes (45%

486,000

540,000

Net income

\) 594,000

\( 660,000

At year end, the market price of Kingston’s stock was \)101 per share, and Benson’s was $63.50.

Instructions

  1. Which company is more profitable in terms of return on total assets?
  2. Which company is more profitable in terms of return on common stockholders’ equity?
  3. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
  4. From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
  5. What is the book value per share for each company?

What factors influence the dividend policy of a company?

Ravonette Corporation issued 300 shares of \(10 par value ordinary shares and 100 shares of \)50 par value preference shares for a lump sum of \(13,500. The ordinary shares have a market price of \)20 per share, and the preference shares have a market price of $90 per share.

Instructions

Prepare the journal entry to record the issuance.
See all solutions

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