149 Stock dividend Firm The stockholders equity account for

14-9 Stock dividend: Firm The stockholders\' equity account for Paper Manufacture 5 shown below. The firm\'s common stock has a current market price of $20 per share Preferred stock Common stock (120,000 shares at $4 par) Paid-in capital in excess of par Retained earnings $ 100,000 480,000 1,920,000 360,000 $2,860,000 Total stockholders\' equity a. How will the stockholders\' equity account change if Paper Manufacturers pays a 5% stock dividend? b. How will the stockholders\' equity account change if Paper Manufacturers pays (1) a 10%, and (2) a 15% stock dividend? c. What is the effect of a stock dividend on the stockholders\' equity?

Solution

Answer a.

Number of shares issued as dividend = 120,000 * 5%
Number of shares issued as dividend = 6,000

Increase in Common Stock = 6,000 * $4
Increase in Common Stock = $24,000

Increase in Paid-in Capital in excess of par = 6,000 * $16
Increase in Paid-in Capital in excess of par = $96,000

Decrease in Retained Earnings = 6,000 * $20
Decrease in Retained Earnings = $120,000

Answer b-1.

Number of shares issued as dividend = 120,000 * 10%
Number of shares issued as dividend = 12,000

Increase in Common Stock = 12,000 * $4
Increase in Common Stock = $48,000

Increase in Paid-in Capital in excess of par = 12,000 * $16
Increase in Paid-in Capital in excess of par = $192,000

Decrease in Retained Earnings = 12,000 * $20
Decrease in Retained Earnings = $240,000

Answer b-2.

Number of shares issued as dividend = 120,000 * 15%
Number of shares issued as dividend = 18,000

Increase in Common Stock = 18,000 * $4
Increase in Common Stock = $72,000

Increase in Paid-in Capital in excess of par = 18,000 * $16
Increase in Paid-in Capital in excess of par = $288,000

Decrease in Retained Earnings = 18,000 * $20
Decrease in Retained Earnings = $360,000

Answer c.

Increase in Common Stock, Increase in Paid-in Capital in Excess of Par and Decrease in Retained Earnings.