Chapter 11, Problem 7BP

a.

To determine

Prepare journal entry to record the transactions.

Explanation of Solution

Cash dividend: 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:

Stock dividends are the number of shares issued by a company to the existing shareholders in a proportion to the number of shares owned by each shareholder, based on a stock dividend percentage.

Small stock dividend:

When the corporation offers stock dividend less than 25% of its total number of outstanding shares, it is known as a small stock dividend.

Large stock dividend:

When the corporation offers stock dividend more than 25% of its total number of outstanding shares, it is known as a large stock dividend.

Difference between the accounting treatment for small stock dividend and the large stock dividend as follows:

The main difference between large and small dividends is the paid-in capital excess of par value account. When small stock dividend is declared, paid-in capital excess of par value account would be created, because small stock dividends are recorded at the market value of per share, but in the case of large stock dividend, stock dividends are issued at the par or at stated value of shares, and the amount large stock dividend is directly added to the issued and outstanding shares of common stock.

Prepare journal entry to record the declaration of large stock dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April 1	Stock dividends		$250,000
	Stock dividend distributable (refer to Equation (1))			$250,000
	(To record declaration of 50% stock dividend on common stock)

Table (1)

Working note:

Calculate the stock dividend distributable.

$\begin{array}{c}\begin{array}{l}\text{Stock dividend}\\ \text{distributable}\end{array}\}=\left(\begin{array}{l}\text{Number of common stocks outstanding}\\ \times \text{Percentage of common stock dividend}\\ \times \text{Par value}\end{array}\right)\\ =\left(\text{50,000 stocks}\times 100\%\times \$5\right)\\ =\$250,000\end{array}$ (1)

Description:

Declaration of stock dividends:

• Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $250,000.
• Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Stock Dividends Distributable account with $250,000.

Prepare journal entry to record the issuance of large stock dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
April 15	Stock dividend distributable (refer to Equation (1))		$250,000
	Common stock			$250,000
	(To record the issuance of stock dividend)

Table (2)

Description:

Issuance of stock dividends declared.

• Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Stock Dividends Distributable amount to Common Stock account. Therefore, debit Stock Dividends Distributable account with $250,000.
• Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $250,000.

Prepare journal entry to record the declaration of small stock dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
December 7	Stock dividends (refer to Equation (3))		$30,000
	Stock dividend distributable (refer to Equation (4))			$10,000
	Paid-in capital excess of par  value $\left(\$30,000-\$10,000\right)$			$20,000
	(To record declaration of 2% small stock dividend on common stock)

Table (3)

Working note:

Calculate the value of stock dividend declared on December 7.

$\begin{array}{c}\text{Stock dividend}=\left(\begin{array}{l}\text{Number of common stocks outstanding}\\ \times \text{Percentage of common stock dividend}\\ \times \text{Market price per share}\end{array}\right)\\ =\left(\begin{array}{l}\left(\begin{array}{l}\text{Shares outstanding as on January 1+}\\ \text{Shares issued as stock dividend on April 1}\end{array}\right)\\ \times 2\%\times \$15\end{array}\right)\\ =\left(\left(50,000\text{shares}+50,000\text{ shares}\right)\times 2\%\times \$15\right)\\ =\$30,000\end{array}$ (3)

Calculate the stock dividend distributable:

$\begin{array}{c}\begin{array}{l}\text{Stock dividend}\\ \text{distributable}\end{array}\}=\left(\begin{array}{l}\text{Number of common stocks outstanding as on April 1}\\ \times \text{Percentage of common stock dividend}\\ \times \text{Par value}\end{array}\right)\\ =\left(\begin{array}{l}\left(\begin{array}{l}\text{Shares outstanding as on January 1+}\\ \text{Shares issued as stock dividend on April 1}\end{array}\right)\\ \times \text{Percentage of common stock dividend}\\ \times \text{Par value}\end{array}\right)\\ =\left(\left(50,000+50,000\right)\times 2\%\times \$5\right)\\ =\text{100,000 stocks}\times 2\%\times \$5\\ =\$10,000\end{array}$ (4)

Description:

Declaration of small stock dividends of 2%:

• Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $30,000.
• Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Stock Dividends Distributable account with $10,000.
• 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 $20,000.

Prepare journal entry to record the issuance of small stock dividend.

Date	Account Title and Explanation	Post Ref.	Debit	Credit
December 17	Stock dividend distributable (refer to Equation (4))		$10,000
	Common stock			$10,000
	(To record the issuance of stock dividend)

Table (4)

Description:

Issuance of stock dividends declared.

• Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Stock Dividends Distributable amount to Common Stock account. Therefore, debit Stock Dividends Distributable account with $10,000.
• Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $10,000.

Prepare journal entry to record the declaration of cash dividend.

Date	Account Title and Explanation	Debit	Credit
December 20	Cash dividends $\left(\$20,000+\$91,800\right)$	$111,800
	Dividends payable – preferred stock (refer to Equation (6))		$20,000
	Dividends payable – common stock (refer to Equation (5))		$91,800
	(To record the declaration of 5% dividend on preferred stock and $0.90 dividend per share on common stock)

Table (5)

Working note:

Calculate the number of common shares outstanding as of December 7.

Particulars	Number of shares
Shares outstanding as of January 1	50,000
Add: Stock dividend declared on April 1$\left(\text{50,000 shares}\times \text{100\%}\right)$	50,000
Shares outstanding as of April 1	100,000
Add: Stock dividend declared on December 7$\left(\text{100,000 shares}\times 2\text{\%}\right)$	2,000
Shares outstanding as of December 7	102,000

Table (6)

Calculate the amount of divdend payabale on common stocks.

$\begin{array}{c}\begin{array}{l}\text{Amount of divdend}\\ \text{payabale on common}\\ \text{stocks}\end{array}\}=\left(\begin{array}{l}\left(\begin{array}{l}\text{Number of common}\\ \text{ stocks outstanding}\end{array}\right)\\ \times \text{Divdiend per share}\end{array}\right)\\ =102\text{,000}\times \$0.90\\ =\text{\$91,800}\end{array}$ (5)

Calculate the amount of divdend payabale on preferred stocks.

$\begin{array}{c}\begin{array}{l}\text{Amount of divdend}\\ \text{payabale on preferred}\\ \text{stocks}\end{array}\}=\left(\begin{array}{l}\text{Number of preferred stocks outstanding}\times \\ \times \text{Divdiend pecentage}\times \text{Par value per share}\end{array}\right)\\ =4\text{,000}\times \$5\%\times \$100\\ =\text{\$20,000}\end{array}$ (6)

Description:

Declaration of cash dividend:

• Declaration of cash dividend will increase the cash dividend account and dividend payable account. Cash dividend is paid out of retained earnings, hence, it is debited. Dividend payable is a liability, hence it is credited.

b.

To determine

Prepare a statement of retained earnings.

Explanation of Solution

Statement of Retained Earnings:

This is a financial statement that determines the amount of earnings kept by the business as retained earnings at the end of the financial year. This statement shows the retained earnings held by the business at the beginning and at the end of the financial year, amount of net income earned during the year and the amount of dividend declared to the shareholder for the year.

Prepare a statement of retained earnings.

Corporation C Statement of retained earnings For the year end December 31
Particulars	Amount
Retained earnings on January, 1	$656,000
Add: Net income	$265,000
	$921,000
Less: Cash dividend declared	$111,800
Stock dividend declared           $\left(\text{\$250,000+\$30,000}\right)$	$280,000
Retained earnings on December, 31	$529,200

Table (7)