Question

During 2020, Red Dragon Corporation had the following transactions and events: 1. Issued par value preferred stock for cash at par value. 2. Issued par value common stock for cash at an amount greater than par value 3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock. 4. Declared a small stock dividend when the market value was higher than the par value. . Declared a cash dividend. 6. Made a prior period adjustment for understatement of net income. 7. Issued par value common stock for cash at par value. 8. Paid the cash dividend. 9. Issued the shares of common stock required by the stock dividend declaration in 4. above. Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders' equity.

Answer 1

Item 3 - Stock split is only par value per share change and so total value of share capital remains same.

For example, 1000 shares @ $10 per share split 2 for 1 will result in 2000 shares (1000*2/1) @ $5 per share

1000 shares @ $10 = $10,000

2000 shares @ $5 = $10,000

So, no journal entry required as Share Capital Value remains same.

Red Dragon Corporation Paid in Capital Item Capital Stock 1 Increase 2 Increase 3 No effect 4 No effect 5 No effect 6 No effect 7 Increase 8 No effect 9 Increase Additional Paid in Capital No effect Increase No effect No effect No effect No effect No effect No effect Increase Retained Earnings No effect No effect No effect Decrease Decrease Increase No effect No effect No effect Journal ent Debit Cash Cash No journal entry as total value remains same, only per share par value changes Retained Earnings Dividends Asset/Liabilit Cash Dividends Payable Stock Dividend Distributable Common Stock Credit 1 Preferred Stock Common Stock Credit 2 Additional Paid in Capital-CS Stock Dividend Distributable Dividends Payable Retained Earnings Common Stock Cash Additional Paid in Capital-CS