Textbook Problem

Brady Company has 30,000 shares of $10 par value common stock authorized and 20,000 shares issued and outstanding. On August 13, 2019, Brady purchased 1,000 shares of treasury stock for $12 per share. Brady uses the cost method to account for treasury stock. On September 14, 2019, Brady sold 500 shares of the treasury stock for $14 per share.

In October 2019, Brady declared and distributed 2,000 shares as a stock dividend from unissued shares when the market value of the common stock was $16 per share.

On December 21, 2019, Brady declared a $1 per share cash dividend, payable on January 11, 2020, to shareholders of record on December 31, 2019.

Required:

1. 1. How should Brady account for the cash dividend, and how would it affect Brady’s balance sheet at December 31, 2019? Explain why.
2. 2. How should Brady account for the stock dividend, and how would it affect Brady’s shareholders’ equity at December 31, 2019? Explain why.
3. 3. How should Brady account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in Brady’s balance sheet at December 31, 2019?