Question

The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $4 per share.

Common stock (60,000 shares at $1 par) $ 60,000

Capital in excess of par 60,000

Retained earnings 180,000

Total equity $ 300,000

The firm intends to first declare a 5 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings). Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

1st transaction

Common stock=

Capital in excess of par=

Retained earnings=

Total equity=

2nd transaction

Common stock=

Capital in excess of par=

Retained earnings=

Total equity=

Answer 1

First Transaction

Stock dividend = No. of shares x stock dividend = 60,000 x 5% = 3,000 shares

The par value of these new shares will be added to the common stock account. The difference between the par value and market price is added to the capital in excess of par and, the market price of these shares will be deducted from retained earnings. Effectively, their will be no change in "Total Equity".

Common Stock (63,000 shares of $1 each)	$63,000
Capital in excess of par [ 60,000 + 3000 x (4 - 1) ]	$69,000
Retained Earnings [ 180,000 - 3000 x 4 ]	$168,000
Total equity	$300,000

Second Transaction

20-cent or $0.20 cash dividend per share will be reduced from retained earnings.

Common Stock (63,000 shares of $1 each)	$63,000
Capital in excess of par	$69,000
Retained Earnings [ 168,000 - 63,000 x $0.20 ]	$155,400
Total equity	$287,400