Dividends and Stock Splits On January 1, 2017, Frederiksen Inc.\'s Stockholders\
ID: 2402409 • Letter: D
Question
Dividends and Stock Splits
On January 1, 2017, Frederiksen Inc.'s Stockholders' Equity category appeared as follows:
The preferred stock is noncumulative and nonparticipating. During 2017, the following transactions occurred:
On March 1, declared a cash dividend of $16,800 on preferred stock. Paid the dividend on April 1.
On June 1, declared a 5% stock dividend on common stock. The current market price of the common stock was $18. The stock was issued on July 1.
On September 1, declared a cash dividend of $0.50 per share on the common stock; paid the dividend on October 1.
On December 1, issued a 2-for-1 stock split of common stock when the stock was selling for $50 per share.
Required:
1. Explain each transaction’s effect on the stockholders’ equity accounts and the total stockholders’ equity.
Feedback
Incorrect
2. Develop the Stockholders' Equity category of the December 31, 2017, balance sheet. Assume that the net income for the year was $650,000.
Feedback
Partially correct
3. Which of the following statements is incorrect?
The value of the shares issued in the large stock dividend is added to the Retained Earnings account and deducted from the Capital Stock account.
issued and outstanding $240,000 Common stock, $10 par value, 15,000 shares
issued and outstanding 150,000 Additional paid-in capital—Preferred 60,000 Additional paid-in capital—Common 225,000 Total contributed capital $675,000 Retained earnings 2,100,000 Total stockholders’ equity $2,775,000
Explanation / Answer
Answer:
1
Transaction
Effect on total
stockholders' equity
On March 1, declared a cash dividend of $16,800 on preferred stock
Retained Earnings and total stockholders’ equity decrease
Paid the dividend on April 1
Total stockholders’ equity remains unchanged.
On June 1, declared a 5% stock dividend on common stock
Both the Common Stock increases and the related APIC increase
by 5%. So, Common Stock increases by $7,500 (15,000 × 5% ×$10). Additional Paid-in Capital—Common Stock increases by$6,000 (15,000 × 5% × 8) (as the current market value of a share is$18). Retained Earnings decrease by $13,500. Total stockholders’ equity does not change. Retained earnings have been transferred into share capital.
The stock was issued on July 1
Common Stock Distributable decreases and common stock increases by $7,500
On September 1, declared a cash dividend of $0.50 per share on the common stock
Retained Earnings and total stockholders’ equity decrease by $7,875 [(15,000 + 750) × $0.50].
Paid the dividend on October 1
Total stockholders’ equity does not change.
On December 1, issued a 2-for-1 stock split of common stock, when the stock was selling for $50 per share
The par value of common stock changes from $10 to $5 as the number of shares issued and outstanding doubles from 15,750 to 31,500, but the total par value does not change. The total stockholders’ equity also does not change
2
FREDERIKSEN’S INC.
PARTIAL BALANCE SHEET
31-Dec-08
Stockholders’ Equity
Preferred stock, $80 par, 7%, 3,000 shares issued
and outstanding
240000
Common stock, $5 par, 31,500 shares* issued and
outstanding
157500
Additional paid-in capital—preferred stock
60000
Additional paid-in capital—common stock
231,000
Total Contributed Capital
688500
Retained earnings
2,711,825
Total Stockholders’ Equity
3400325
Working notes for the above answer is as under
W.N-1
Calculation for Common stock, $5 par, 31,500 shares
=15,000 + 750 stock dividend × 2 stock split
= 31,500.
W.N-2
Additional paid-in capital—common stock
=$225,000 + $6,000 stock dividend
= $231,000.
W.M-3
Retained earning balance
=$2,100,000 – $16,800 cash dividend – $13,500 stock dividend – $7,875 cash dividend + $650,000 net income
= $2,711,825.
_____________________________________________________________
3
A stock dividend results in the capitalization of part of the Retained Earnings account. The value of the shares issued in the stock dividend is deducted from the Retained Earnings account and added to the Capital Stock account (and the Additional Paid-in Capital account for small stock dividends).
Transaction
Effect on total
stockholders' equity
On March 1, declared a cash dividend of $16,800 on preferred stock
Retained Earnings and total stockholders’ equity decrease
Paid the dividend on April 1
Total stockholders’ equity remains unchanged.
On June 1, declared a 5% stock dividend on common stock
Both the Common Stock increases and the related APIC increase
by 5%. So, Common Stock increases by $7,500 (15,000 × 5% ×$10). Additional Paid-in Capital—Common Stock increases by$6,000 (15,000 × 5% × 8) (as the current market value of a share is$18). Retained Earnings decrease by $13,500. Total stockholders’ equity does not change. Retained earnings have been transferred into share capital.
The stock was issued on July 1
Common Stock Distributable decreases and common stock increases by $7,500
On September 1, declared a cash dividend of $0.50 per share on the common stock
Retained Earnings and total stockholders’ equity decrease by $7,875 [(15,000 + 750) × $0.50].
Paid the dividend on October 1
Total stockholders’ equity does not change.
On December 1, issued a 2-for-1 stock split of common stock, when the stock was selling for $50 per share
The par value of common stock changes from $10 to $5 as the number of shares issued and outstanding doubles from 15,750 to 31,500, but the total par value does not change. The total stockholders’ equity also does not change