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Dividends and Stock Split, Math Problem Example

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Math problem

Practice Question 5 – Cash Dividends

A company has the following shares issued

6% Preferred Stock $100 par value, cumulative,

20,000 shares authorized 2,000 shares issued and outstanding                              $200,000

Paid-in capital in excess of par value – preferred Stock                                               20,000

Common Stock, $1.50 par value, 2,000,000 shares authorized,

300,000 shares issued and outstanding                                                                          450,000

Paid-in capital in excess of par value – common Stock                                                 150,000

  1. On June 30, 2010, the company’s year end, the board of directors declares a $0.20 dividend to common stockholders. There are no dividends in arrears.

How much will the preferred shareholders receive? $16,000

How much will the common shareholders receive? $4,000

  1. If the preferred stock had 2 years of dividends in arrears (2008 and 2009) how much would be owed the preferred stockholders at June 30, 2010?

$48,000

  1. If common stockholders are to receive $0.20 per share and preferred stock has 2 years of dividends in arrears, how much is the total dividend to be paid?

$20,000 to each preferred stockholder and none to common stock shareholders.

  1. What is the journal entry to record the above dividend on June 30, 2010?
Date Accounts Debit Credit
6/30/2010 Preferred stock 20,000 28,000
6/30/2010 Common stock 0 4,000
  1. What entry is made on the record date?  The preferred stock entry.
  2. What entry is made on the payment date of July 15, 2008?

Date Accounts Debit Credit
7/15/2008 Retained Earnings 30000
7/15/2008 Credit to Dividends 30000
  1. Why are dividends in arrears not recorded as a liability?

No payment obligation exists until the board of directors declares a dividend.

  1. Stock Dividend
  2. Stock dividends are a pro rata distribution of shares to the existing stockholders.
  3. Stock dividends increase paid-in capital and decrease retained earnings.
  4. After a stock dividend the shareholder will have more shares but their percentage ownership will be unchanged.
  5. Small stock dividends (less than 20%-25% of the shares issued) are recorded at the market price of the shares
    • At the record date the par valueis recorded in common stock dividend distributable and the amount over par is recorded in paid-in capital in excess of par.
    • On the payment date the common stock dividend distributable is removed and the par value is recorded in the common stock account.
  6. Large stock dividends (more than 20%-25% of the shares issued) are recorded at par value.

 

Practice Question6 – Stock Dividend

On 12/31/09, a 15% stock dividend is declared when the market price of the shares is $3 to be paid 1/15/10.

Common Stock, $1 par value, 1,000,000 authorized,

300,000 shares issued and outstanding                                      $300,000

Paid-in capital in excess of par value – Common Stock            150,000

  1. What is the amount of the dividend? .45                                                                                         
  2. What is the entry on the declaration date?
Date Accounts Debit Credit
12/31/09 Dividends payable 67,500
12/31/09 Cash dividend declared 67,500
  1. Where is the account common stock dividends distributable reported?

It is added to capital stock on the balance sheet.

 

  1. What is the entry on the payment date?
Date Accounts Debit Credit
1/15/2010 Retained earnings 67,500
1/15/2010 Credit to dividend 67,500

 

XI.           Stock Splits

A.              Sometimes companies will issue additional shares in order to increase the marketability of their stock.

B.              By issuing additional shares the market price per share decreases making the stock more affordable.

C.              Stock splits are stated as 2 for 1, 3 for 1, etc.

1.               In a 2 for 1 split the shareholders will receive one additional share for every share they presently own.

2.               After the split they will have two shares when before the split they only had one.

D.              There is no journal entry required because with a stock split the par value or stated value is adjusted to reflect the additional shares issued.

Practice Question 7 – Stock Split

A company decides to issue a 2 for 1 stock split.  Before the split the company has the following stockholders; equity:

Paid-in capital

Common Stock $2 par value, 10,000,000 shares authorized

150,000 shares issued and outstanding                                       $300,000

Paid-in capital in excess of par value – Common Stock            150,000

Total paid-in capital                                                                          450,000

Retained earnings                                                                              250,000

Total stockholders’ equity                                                                $700,000

 

  1. How many additional shares will be issued? 150,000                                                                   
  2. How many shares will be issued and outstanding after the stock split? 300,000                          
  3. What will be the par value of the stock after the stock split? $2 par value, $600,000                   
  4. What will be the total of stockholders’ equity after the stock split?       $1,150,000                   
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