(Dividend Entries) The following data were taken from the balancesheet accounts of Masefield Corporation on December 31, 2016.

Current assets \(540,000

Debt investments (trading) 624,000

Common stock (par value \)10) 500,000

Paid-in capital in excess of par 150,000

Retained earnings 840,000

Instructions

Prepare the required journal entries for the following unrelated items.

1. A 5% stock dividend is declared and distributed at a time when the market price per share is \(39.
2. The par value of the common stock is reduced to \)2 with a 5-for-1 stock split.
3. A dividend is declared January 5, 2017, and paid January 25, 2017, in bonds held as an investment. The bonds have a book value of \(100,000 and a fair value of \)135,000.

Step by step solution

01

Meaning of Dividend

A dividend means a reward by a company to its shareholders in cash, stock, and non-monetary term. It is calculated as the share of the profit made by the company at the end of the accounting period.

02

Preparing Journal Entries for Requirement (a)

S.no.	Particular	Debit $	Credit $
(a)	Retained Earnings	97,500
	Common Stock Dividend Distribution Distributable		25,000
	Paid-in Capital in Excess Par-Common Stock		72,500
	To record the issue of dividend
(b)	Common Stock Dividend Distribution	25,000
	Common Stock		25,000
	To record the declaration of dividend

Working notes:

$\begin{array}{rcl}\mathbf{Retained}\mathbf{}\mathbf{Earnings}& \mathbf{=}& \mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{shares}\mathbf{}\mathbf{outstanding}\mathbf{\times }\mathbf{Per}\mathbf{}\mathbf{share}\mathbf{}\mathbf{price}\mathbf{\times }\mathbf{Rate}\mathbf{}\mathbf{of}\mathbf{}\mathbf{dividend}\\ & \mathbf{=}& \mathbf{50}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{39}\mathbf{\times }\mathbf{5}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{97}\mathbf{,}\mathbf{500}\end{array}$

03

Explaining when the par value of the common stock is reduced to $2 with a 5-for-1 stock split.

No entry, memorandum note to indicate that par value is reduced to $2 and shares outstanding are 250,000 calculates as below:

$\begin{array}{rcl}\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{shares}\mathbf{}\mathbf{outstanding}& \mathbf{=}& \mathbf{Current}\mathbf{}\mathbf{number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{shares}\mathbf{\times }\mathbf{5}\mathbf{-}\mathbf{for}\mathbf{-}\mathbf{1}\mathbf{}\mathbf{stock}\mathbf{}\mathbf{spliy}\\ & \mathbf{=}& \mathbf{50}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{5}\\ & \mathbf{=}& \mathbf{250}\mathbf{,}\mathbf{000}\end{array}$

04

Preparing Journal Entries for Requirement (b)

Date	Particular	Debit ($)	Credit ($)
January 5, 2014	Debt Investment	35,000
	Unrealized Holding Gain or Loss-Income		35,000
	To record the declaration of dividend
	To record the issue of dividends.
January 5, 2014	Retained Earnings	135,000
	Property Dividends Payable		135,000
	To record the declaration of dividend.
January 25,2014	Property Dividends Payable	135,000
	Debt Investments		135,000
	To record the dividend paid in bond.

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