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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Stock Dividend Comparison Although Oriole Company has enough retained earnings legally to declare a dividend, its working capital is low. The board of directors is considering a stock dividend instead of a cash dividend. The common stock is currently selling at $34 per share. The following is Oriole’s current shareholders’ equity:

Chapter 16, Problem 5E, Stock Dividend Comparison Although Oriole Company has enough retained earnings legally to declare a

Required:

  1. 1. Assuming a 15% stock dividend is declared and issued, prepare the shareholders’ equity section immediately after the date of issuance.
  2. 2. Assuming, instead, that a 30% stock dividend is declared and issued, prepare the shareholders’ equity section immediately after the date of issuance.
  3. 3. Next Level What unusual result do you notice when you compare your answers from Requirement 1 with Requirement 2? From a theoretical standpoint, how might this have been avoided?

1.& 2.

To determine

Compute the stockholder’s equity section immediately after the date of issuance by assuming that 15% of stock dividend is declared and issued.

Explanation

Stockholders’ Equity Section:

It is refers to the section of the balance sheet that shows the available balance stockholders’ equity as on reported date at the end of the financial year.

Compute the stockholder’s equity section immediately after the date of issuance by assuming that 15% and 30 % of stock dividend is declared and issued.

Stockholder's equity 15 % stock dividend30 % stock dividend
Common stock, $10 par(1) 460,000(2) 520,000
Additional paid-in capital on common stock(3) 944,000800,000
Total contributed capital1,404,0001,320,000
Retained earnings(4) 1096000(5) 1180000
Total shareholders’ equity2,500,0002,500,000

(Table 1)

Working notes:

(1) Calculate the value of common stock at 15 % stock dividend.

Value of common stock when stock dividend is 15%}(Amount on common stock× stock dividend)+Common stock value =($400,000×15%)+$400,000=$60,000+$400,000=$460,000

(2) Calculate the value of common stock at 30 % stock dividend.

Value of common stock when stock dividend is 30%}(Amount on common stock× stock dividend)+Common stock value =($400,000×30%)+$400,000=$120,000+$400,000=$520,000

(3) Calculate the value of additional capital when stock dividend is 15%

2.

To determine

State the unusual result will be noticed when the answers of the requirement 1 and requirement 2 are compared.

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