Chapter 11, Problem 11.8AP

(a)

To determine

Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.

Stock Dividends: It refers to the payment of dividends by a company to its existing shareholders, in the form of additional shares rather than cash. Stock dividends are paid, when there is inadequate cash available in the company.

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

To Journalize: the payment of cash dividends and stock dividends for Corporation T.

Answer to Problem 11.8AP

Record the journal entries for the payment of cash dividends and stock dividends for Corporation T.

Date		Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
January	15	Cash Dividends                               (1)		35,000
		Dividends Payable			35,000
		(To record cash dividends declared)
February	15	Dividends Payable		35,000
		Cash			35,000
		(To record payment of cash dividends)
April	15	Stock Dividends                               (3)		98,000
		Common Stock Dividends Distributable                                    (4)			70,000
		Paid-in Capital in excess of Par Value-Common stock                      (5)			28,000
		(To record declaration of stock dividends)
May	15	Common Stock Dividends Distributable		70,000
		Common Stock			70,000
		(To record distribution of stock dividends)
December	1	Cash Dividends                                (6)		46,200
		Dividends Payable			46,200
		(To record declaration of dividends)
December	31	Income Summary		400,000
		Retained Earnings			400,000
		(To record closing of net income to income summary account)
December	31	Retained Earnings		98,000
		Stock Dividends			98,000
		(To record closing of stock dividends to retained earnings account)
December	31	Retained Earnings		81,200
		Cash Dividends                          (7)			81,200
		((To record closing of cash dividends to retained earnings account)

Table (1)

Working Notes:

Compute the amount of cash dividends payable to common stockholders.

  $\begin{array}{c}\begin{array}{l}\text{Dividends payable to }\\ \text{common stockholders}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares outstanding}\times \\ \text{Dividend per share}\end{array}\right\}\\ \text{= 70,000 shares}\times \text{\$0}\text{.50}\\ \text{= \$35,000}\end{array}$ (1)

Compute the stock dividends shares.

  $\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 70,000 shares × 120\%}\\ \text{= 7,000 shares}\end{array}$ (2)

Compute the stock dividends amount payable to common stockholders.

  $\begin{array}{c}\text{Stock dividends = Stock dividend shares }\times \text{ Market value per share}\\ \text{= 7,000 shares}\left(2\right)\text{ × \$14}\\ \text{= \$98,000}\end{array}$ (3)

Compute common stock dividends distributable value.

  $\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Stock dividend shares }\times \text{ Par value of stock}\\ \text{= 7,000 shares}\left(2\right)\text{ × \$10}\\ \text{= \$70,000}\end{array}$ (4)

Compute paid-in capital in excess of par value-common stock.

  $\begin{array}{c}\text{Paid-in capital = Stock dividends –Common stock value}\\ \text{= \$98,000}\left(3\right)\text{ – \$70,000}\left(4\right)\\ \text{= \$28,000}\end{array}$ (5)

Compute the amount of cash dividends payable to common stockholders.

  $\begin{array}{c}\begin{array}{l}\text{Cash}\text{Dividends payable to }\\ \text{common stockholders}\end{array}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Number of shares outstanding+}\\ \text{Stock dividend shares}\end{array}\right)\times \\ \text{Dividend per share}\end{array}\right\}\\ \text{= }\left(\text{70,000}\text{shares+7,000 shares}\left(2\right)\right)\times \text{\$0}\text{.60}\\ \text{= 77,000 shares}\times \text{\$0}\text{.60}\\ \text{= \$46,200}\end{array}$ (6)

Compute the total amount of cash dividends.

  $\begin{array}{c}\text{Total amount}\text{cash}\text{dividends = }\left\{\begin{array}{l}\text{Cash dividends declared on January 15+ }\\ \text{Cash dividends declared on December 1}\end{array}\right\}\\ \text{= \$35,000+\$46,200}\\ \text{= \$81,200}\end{array}$ (7)

Explanation of Solution

January 15: Declared cash dividends at $0.50 per share.

• Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $35,000.
• Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $35,000.

February 15: Paid the cash dividends declared.

• Dividends Payable is a liability account and the amount is decreased because the dividends owed are paid off. Therefore, debit Dividends Payable with $35,000.
• Cash is an asset account and the amount is decreased because cash is paid. Therefore, credit Cash account with $35,000.

April 15: Declared 10% stock dividends.

• Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $98,000.
• Common Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Common Stock Dividends Distributable account with $70,000.
• Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount has increased due to increase in capital excess of common stock value. Therefore, credit Paid-in Capital in Excess of Par Value account with $28,000.

May 15: Distribution of stock dividends declared.

• Common Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Common Stock Dividends Distributable amount to Common Stock account. Therefore, debit Common Stock Dividends Distributable account with $70,000.
• Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $70,000.

December 1: Declared cash dividends at $0.60 per share.

• Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $46,200.
• Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $46,200.

December 31: Transfer of net income to retained earnings

• Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Therefore, debit Income Summary account with $400,000.
• Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $400,000.

December 31: Transfer of cash dividends to retained earnings

• Retained Earnings is a stockholders’ equity account. The amount has decreased because Cash dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $81,200.
• Cash Dividends is a temporary stockholders’ equity account. The account is credited as the cash dividends are transferred to Retained Earnings account to eventually close Cash Dividends account. Therefore, credit Cash Dividends account with $81,200.

December 31: Transfer of stock dividends to retained earnings

• Retained Earnings is a stockholders’ equity account. The amount has decreased because Stock dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $98,000.
• Stock Dividends is a contra capital stockholders’ equity account. The account is credited as the stock dividends are transferred to Retained Earnings account to eventually close Stock Dividends account. Therefore, credit Stock Dividends account with $98,000.

(b)

To determine

To post: the journal entries into stockholders’ equity accounts.

Explanation of Solution

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

Common stock account is a component of stockholders’ equity account with a normal credit balance.

Common Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing Balance	770,000		January 1	Balance	700,000
				May 15	Common stock dividends distributable	70,000
	Total	770,000			Total	770,000
				January 1, 2018	Opening Balance	770,000

Table (2)

Retained earnings account is a component of stockholders’ equity account with a normal credit balance.

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31	Stock dividends	98,000		January 1	Balance	620,000
December 31	Cash dividends	81,200		December 31	Income Summary	400,000
December 31,2017	Closing Balance	840,800
	Total	1,020,000			Total	1,020,000
				January 1, 2018	Opening Balance	$840,000

Table (3)

Paid-in Capital in Excess of Par Value–Common Stock account is a component of stockholders’ equity account with a normal credit balance.

Paid-in Capital in Excess of Par Value–Common Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2017	Closing Balance	528,000		January 1	Balance	500,000
				April 15	Stock Dividends	28,000
	Total	$528,000			Total	$528,000
				January 1, 2018	Opening Balance	$528,000

Table (4)

Common Stock Dividends Distributable account is a contra-component of stockholders’ equity account with a normal credit balance.

Common Stock Dividends Distributable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
May 15	Common Stock	70,000		April 15	Stock Dividends	70,000
	Total	$70,000			Total	$70,000

Table (5)

Cash dividends account is a component of stockholders’ equity account that is closed to retained earnings.

Cash Dividends Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 15	Dividends payable	35,000		December 31	Retained Earnings	$81,200
December 1	Dividends payable	46,200
	Total	81,200			Total	81,200

Table (6)

Stock dividends account is a component of stockholders’ equity account that is closed to retained earnings.

Stock Dividends Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 15	Common Stock Dividends Distributable	70,000		December 31	Retained Earnings	$98,000
April 15	Paid-in Capital in excess of par value-common stock	28,000
	Total	98,000			Total	98,000

Table (7)

(c)

To determine

To Prepare: the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.

Explanation of Solution

Prepare the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.

Corporation T
Balance Sheet (Partial)
December 31, 2017
Particulars	Amount ($)	Amount ($)
Stockholders’ equity
Paid-in Capital
Capital stock
Common stock, $10 par value, 77,000 shares                  issued and outstanding	770,000
Total capital stock		$770,000
Additional paid-in capital
Paid-in capital in excess of stated value–Common             stock	528,000
Total additional paid-in capital		528,000
Total paid-in capital		1,298,000
Retained earnings		840,800
Total paid-in capital and retained earnings		2,647,500
Less: Treasury stock		(0)
Total stockholders’ equity		$2,138,800

Table (8)

(d)

To determine

To Calculate: the payout ratio for Corporation T.

Answer to Problem 11.8AP

Calculate the payout ratio for Corporation T for 2017.

  $\begin{array}{c}\text{Payout ratio = }\frac{\text{Cash dividend declared on common stock}}{\text{Net income}}\times 100\\ \text{=}\frac{\text{\$81,200}\left(7\right)}{\text{\$400,000}}\text{×100}\\ \text{=20}\text{.3\%}\end{array}$

Explanation of Solution

Payout Ratio: It refers to a measure that evaluates the amount of dividends paid to the shareholders out of the net income earned by a corporation. It is generally expressed as a percentage. The formula to calculate the payout ratio is as follows:

  $\text{Payout ratio = }\frac{\text{Cash dividend declared on common stock}}{\text{Net income}}\times 100$

Conclusion

Therefore, the Payout ratio for Corporation T for 2017 is 20.3%.

To determine

To Calculate: the return on common stockholders’ equity for Corporation T.

Answer to Problem 11.8AP

Calculate the return on common stockholders’ equity for Corporation T:

  $\begin{array}{c}\begin{array}{l}\text{Return on common}\\ \text{stockholders' equity}\end{array}\}=\frac{\text{Net income–Preferred dividends}}{\text{Average common stockholders' equity}}\times 100\\ =\frac{\$400,000–\$0}{\text{\$1,979,400}\left(9\right)}\times 100\\ =20.2\%\end{array}$

Working notes:

Compute beginning stockholders’ equity.

  $\begin{array}{c}\begin{array}{l}\text{Beginning common}\\ \text{stockholders’ equity}\end{array}\}\text{= }\left\{\begin{array}{l}\text{Common stock+}\\ \text{Paid-in capital in excess of par value+}\\ \text{Retained earnings}\end{array}\right\}\\ \text{=\$700,000+\$500,000+\$620,000}\\ =\$1,820,000\end{array}$ (8)

Compute average stockholders’ equity.

  $\begin{array}{c}\begin{array}{l}\text{Average common}\\ \text{stockholders’ equity}\end{array}\}\text{=}\left(\frac{\begin{array}{l}\text{Beginning balance of stockholders’ equity }\\ \text{+}\text{Ending balance of stockholders’ equity }\end{array}}{\text{2}}\right)\\ \text{=}\frac{\text{\$1,820,000}\left(8\right)\text{+\$2,138,800}\left(\text{Refer}\text{Table}\text{8}\right)}{\text{2}}\\ =\$1,979,400\end{array}$ (9)

Explanation of Solution

Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:

  $\begin{array}{l}\text{Return on common}\\ \text{stockholders' equity}\end{array}\}=\frac{\text{Net income–Preferred dividends}}{\text{Average common stockholders' equity}}\times 100$

Conclusion

Therefore, the Return on Common Stockholders’ equity for Corporation T is 20.2%