Question

The stockholder's equity section of Jun Co's. balance sheets as of April 1 follows. On April 2 Jun declares and distributes a 15% stock dividend. The stock's per share market value on April 2 is $15 (prior to the dividend.)

Common stock $5 par value, 515,000 shares authorized, 270,000 shares issued and outstanding $1,350,000

Paid-in capital in excess of par value, common stock $630,000

Retained earnings $903,000

Total stockholders equity $2,883,000

Prepare the stockholders equity section immediately after the stock dividend is distributed.

Answer 1

When the stock dividend is issued total shareholders equity will not be affected. The reason behind this is no amount is distributed in cash, only shares are issued free of cost to existing shareholders. As the shares are given for free instead of cash retained earnings will be reduced by the amount of dividend that is distributed.

Please find the calculations below

Sr	Particulars	Amount	explanation
a	Total shares outstanding	270000
b	Number of shares Dividend @15%	40500	a X 15%
c	Par Value of shares @ 5	202500	b X 5
d	Paid-in capital in excess of par value @ 10	405000	b X 10

Paid up capital in excess of par value is market value 15 minus par value 5 = 10

The stockholders equity statement before and after the dividend is issued is as under:-

Particulars	Shareholders equity before issue of stock dividend	issue of stock dividend	Shareholders equity after issue of stock dividend
common stock	1,350,000	202500	1,552,500
excess	630,000	405000	1,035,000
retained	903,000	-607500	295,500
total	2,883,000		2,883,000