Question

On June 30, Sharper Corporation’s stockholders' equity section of its balance sheet appears as follows before any stock dividend or split. Sharper declares and immediately distributes a 50% stock dividend. Common stock—$10 par value, 120,000 shares authorized, 74,000 shares issued and outstanding $ 740,000 Paid-in capital in excess of par value, common stock 320,000 Retained earnings 720,000 Total stockholders’ equity $ 1,780,000 Required: (1) Prepare the updated stockholders' equity section after the distribution is made. (2) Compute the number of shares outstanding after the distribution is made.

Answer 1

Sharper Corporation
Balance Sheet (Partial)
Stockholders' Equity:
Common stock-$10 par value, 120,000 shares authorized, 111,000 shares issued and outstanding	1110000
Paid-in capital in excess of par value, common stock	320000
Retained earnings	350000
Total stockholders' equity $	1780000

In case of a large stock dividend (> 25%), the par value of the shares being issued is transferred from the retained earnings to the paid-in capital section of stockholders' equity.

Number of common shares issued as stock dividend = 74000 x 50% = 37000 shares

Amount transferred from retained earnings = 37000 x $10 = $370000

Thus, Common stock = $740000 + $370000 = $1110000

Retained earnings = $720000 - $370000 = $350000

The total stockholders' equity remains unchanged at $1780000.