P15-11. (Stock and Cash Dividends) 7 8 9 Earnhart Corporation has outstanding 3,
ID: 2463347 • Letter: P
Question
P15-11.
(Stock and Cash Dividends)
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Earnhart Corporation has outstanding 3,000,000 shares of common stock of a par value of $10 each. The balance in its Retained Earnings account at January 1, 2014, was $24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $5,000,000. During 2014, the company's net income was $4,700,000. A cash dividend of $0.60 a share was declared on May 5, 2014, and was paid June 30, 2014, and a 6% stock dividend was declared on November 30, 2014, and distributed to stockholders of record at the close of business on December 31, 2014. You have been asked to advise on the proper accounting treatment of the stock dividend.The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.
October 31, 2014
$31
November 30, 2014
$34
December 31, 2014
$38
Instructions
Prepare the journal entry to record the declaration and payment of the cash dividend.
Prepare the journal entry to record the declaration and distribution of the stock dividend.
Prepare the stockholders' equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2014 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.
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Explanation / Answer
Answer: a)
May 5 Retained earnings Dr. 1800000
To dividend payable (3000000*$0.60).........1800000
June 30 Dividend payable Dr. 1800000
To cash..........................................1800000
Answer: b)
Nov. 30 Retained earnings (6%*3000000*34) 6120000
To common stock dividend distributable...........................1800000
To paid in capital in excess of par- common stock ............4320000
Dec. 31 Common stock dividend distributable Dr.1800000
To common stock............................................................1800000
Answer: c)
Earnhart corporation
Balance sheet (partial)
as of december 31, 2014
Statement of retained earnings
For the year ended december 31, 2014
Beginning balance.......................................................................................................................24000000
Add: net income.........................................................................................................................4700000
Less:dividend on common stock (1800000+6120000)....................................................................7920000
Ending balance..........................................................................................................................20780000
Schedule of additional paid in capital
For the year ended december 31, 2014
Beginning balance.......................................................................................................................5000000
Excess of fair value over par value of 180,000 share of common stockdistributed as a dividend ..........4320000
Ending balance..............................................................................................................................9320000
Note: The 6% stock dividend, on 180,000 shares, was declared on November 30, 2014. For the purpose of the dividend, the stock was asigned a price of $34 per share.The par value of $10per share ($1,800,000) was credited to Common Stock and the excess of $24 ($34 - $10) per share ($4,320,000) to Paid-in capital in excess of par - Common stock.
Common stock- $10 par value, 3180000 shares issued 31800000 additional paid in capital 9320000 Retained earnings 20780000 Total stockholder's equity 61900000Related Questions
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