The Western Pipe Company has the following capital section in its balance sheet.
ID: 2634847 • Letter: T
Question
The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $6 per share.
Common stock (50,000 shares at $2 par) $100,000
Capital in excess of par $100,000
Retained earnings $250,000
Net worth $450,000
The firm intends to first declare a 15 percent stock dividend and then pay a 25-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.
Explanation / Answer
FIRST TRANSACTION
15% stock dividend implies that additional shares of the number 50000*15% = 750 is issued.
PARTICULARS
AMOUNT
Common Stock (57,500 shares at $2 par)
115000
Capital in excess of par
100000
Retained Earnings [250,000 - 7,500*2]
235000
NET WORTH
450000
SECOND TRANSACTION
$0.25/share is paid as dividends.
PARTICULARS
AMOUNT
Common Stock (57,500 shares at $2 par)
115000
Capital in excess of par
100000
Retained Earnings [235,000 - 57,500*0.25]
220625
NET WORTH
435625
PARTICULARS
AMOUNT
Common Stock (57,500 shares at $2 par)
115000
Capital in excess of par
100000
Retained Earnings [250,000 - 7,500*2]
235000
NET WORTH
450000
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