Question

The company with the common equity accounts shown here has declared a 12 percent stock dividend at a time when the market value of its stock is $59 per share.

Common stock ($1 par value) $ 400,000
Capital surplus 1,572,000
Retained earnings 3,864,000
Total owners’ equity $ 5,836,000

Show the new equity account balances after the stock dividend distribution. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

Common stock $
Capital surplus
Retained earnings
Total owners’ equity $

Answer 1

Current No. of shares = Common stock / Par value = $400,000 / $1 = 400,000 shares

No. of shares to be distributed = No. of shares x Stock dividend = 400,000 x 12% = 48,000

The common stock account will increase by the par value of new shares and difference between the market price and par value, i.e., premium on shares will be added to the capital surplus account. Finally, retained earnings will be reduced by the market value of shares. Effectively, their is no change in Total owners' equity.

Common Stock (448,000 shares @ $1 par value)	$448,000
Capital Surplus [ 1,572,000 + 48,000 x ($59 - $1) ]	$4,356,000
Retained Earnings [ $3,864,000 - (48,000 x $59) ]	$1,032,000
Total Owners' Equity	$5,836,000