Chapter 10, Problem 72E

Stock Dividends and Stock Splits

The balance sheet of Castle Corporation includes the following stockholders’ equity section:

Required:

1. Assume that Castle issued 60,000 shares for cash at the inception of the corporation and that no new shares have been issued since. Determine how much cash was received for the shares issued at inception.
2. Assume that Castle issued 30,000 shares for cash at the inception of the corporation and subsequently declared a 2-for-l stock split. Determine how much cash was received for the shares issued at inception.
3. Assume that Castle issued 57,000 shares for cash at the inception of the corporation and that the remaining 3,000 shares were issued as the result of stock dividends when the stock was selling for $53 per share. Determine how much cash was received for the shares issued at inception.

To determine

(a)

Introduction:

Common stock is issued by the company to raise finance using equity. It isissued to the investors (who are regarded as stockholders or shareholders, once common stock are issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

To calculate:

Cash received on issue of shares.

Answer to Problem 72E

$491,800 was received as cash at the inception of corporation.

Explanation of Solution

Given:

The following equity statement:

Particulars	$
Common stock, $2 par, 80,000 shares authorized, 60,000 issued and outstanding	120,000
(+) Additional Paid-in capital − common stock	371,800
Total Capital Stock	491,800
Retained Earnings	173,000
Total Stockholders’ equity	664,800

At the time of inception:

No. of shares issued = 60,000

Par value = $2

Total Par Value of shares issued = $\text{No}\text{. of shares issued × Par value}$

Total Par Value of shares issued = $\text{60,000 × \$2}$

Total Par Value of shares issued = $120,000

Additional Paid in capital −common stock = $371,800

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
No date given	Cash Dr. Common Stock Additional Paid in capital −common stock (Issue of shares at the inception of corporation.)	491,800	120,000 371,800

To determine

(b)

Introduction:

A common stock is issued by the company to raise finance using equity. It is issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

To calculate:

Cash received on issue of shares and split stock.

Answer to Problem 72E

$467,210 was received as cash at the inception of corporation.

Explanation of Solution

Given:

The following equity statement:

Particulars	$
Common stock, $2 par, 80,000 shares authorized, 60,000 issued and outstanding	120,000
(+) Additional Paid-in capital − common stock	371,800
Total Capital Stock	491,800
Retained Earnings	173,000
Total Stockholders’ equity	664,800

At the time of inception:

No. of shares issued = 60,000

Par value = $2

Total Par Value of shares issued = $\text{No}\text{. of shares issued × Par value}$

Total Par Value of shares issued = $\text{60,000 × \$2}$

Total Par Value of shares issued = $120,000

Additional Paid in capital −common stock = $371,800

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
No date given	Cash Dr. Common Stock Additional Paid in capital −common stock (Issue of shares at the inception of corporation.)	491,800	120,000 371,800

Before stock split:

No. of shares issued = 60,000

Par value = $2

After, 2-for1 stock split:

No. of shares issued = $60,000\times 2$

No. of shares issued = 120,000

Par value = $\frac{\$2}{2}$

Par value = $1

No journal entry is recorded on stock. Though,the common stock capital remains same, only its structure i.e. no. of shares outstanding and par value of shares change.

Thus, the cash received from issues of shares and immediate stock split will be same as the cash received from issues of shares.

To determine

(c)

Introduction:

A common stock is issued by the company to raise finance using equity. It is issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

To calculate:

Cash received on issues of shares and stock dividend thereof.

Answer to Problem 72E

$491,800 was received as cash at the inception of corporation.

Explanation of Solution

Given:

The following equity statement:

Particulars	$
Common stock, $2 par, 80,000 shares authorized, 60,000 issued and outstanding	120,000
(+) Additional Paid-in capital − common stock	371,800
Total Capital Stock	491,800
Retained Earnings	173,000
Total Stockholder’s equity	664,800

At the time of inception:

No. of shares issued = 57,000

Par value = $2

Total Par Value of shares issued = $\text{No}\text{. of shares issued × Par value}$

Total Par Value of shares issued = $\text{57,000 × \$2}$

Total Par Value of shares issued = $114,000

Additional Paid in capital (for 60,000) common stock = $371,800

Additional Paid in capital (for 57,000) common stock = $\frac{\$371,800}{60,000}\times 57,000$

Additional Paid in capital (for 57,000) common stock = $353,210

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
No date given	Cash Dr. Common Stock Additional Paid in capital −common stock (Issue of shares at the inception of corporation.)	467,210	114,000 353,210

Stock Dividend = 3,000 shares

Market Value of shares = $53

Par Value of shares = $2

Total Par value of stock dividend = $\text{No}\text{. of shares issued as stock dividend × Par value}$

Total Par value of stock dividend = $\text{3,000 × \$2}$

Total Par value of stock dividend = $6,000

Total Market value of stock dividend = $\text{No}\text{. of shares issued as stock dividend × Market value}$

Total Market value of stock dividend = $\text{3,000 × \$53}$

Total Market value of stock dividend = $159,000

Additional Paid in capital = Total Market value of stock dividend - Total Par value

Additional Paid in capital = $159,000 - $6,000

Additional Paid in capital = $153,000

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
No date given	Retained Earnings Dr. Common Stock Additional Paid in capital −common stock (Issue of shares at the inception of corporation.)	159,000	6,000 153,000

The first effect of both dividends (cash and stock) is on Retained Earnings of the company. If stock dividend is paid then, the second effect is on common stock and additional paid in capital account as new shares are issued as dividends which further increase the balance of these accounts.

Thus, stock dividend don’t involve any cash transaction and the amount received at the time of inception remains $467,210 (i.e. the amount received on issues of shares).