The P Company has the following capital structure: Common stock ($5 par, 250,000
ID: 2804818 • Letter: T
Question
The P Company has the following capital structure:
Common stock ($5 par, 250,000 shares)
$1,250,000
Contributed capital in excess of par
$5,000,000
Retained earnings
$4,000,000
The company declares a 10 percent stock dividend. The pre-stock dividend market price of the company’s stock is $50. Determine the balance in the retained earnings account after the stock dividend. Determine the balance in the common stock account after the stock dividend.
Common stock ($5 par, 250,000 shares)
$1,250,000
Contributed capital in excess of par
$5,000,000
Retained earnings
$4,000,000
Explanation / Answer
Company P (before stock dividend)
Amount
Common stock ($5 par, 250,000 shares)
$1,250,000
Contributed capital in excess of par
$5,000,000
Retained earnings
$4,000,000
The stock dividend will impact the Retained earnings only and no impact on Common Stock:
Stock dividend is calculated on par value i.e. $1,250,000 ($ 5 par x 250000 share)
Hence, 10% dividend on $1,250,000 = $1,250,000 x 10% = $ 125,000 Dividend paid
Revised Retained earnings = Pervious Balance – Dividend paid
Revised Retained earnings = $4,000,000 - $125,000
Revised Retained earnings = $3,875,000
Revised position as under:
Company P (After stock dividend)
Amount
Common stock ($5 par, 250,000 shares)
$1,250,000
Contributed capital in excess of par
$5,000,000
Retained earnings
$3,875,000
Company P (before stock dividend)
Amount
Common stock ($5 par, 250,000 shares)
$1,250,000
Contributed capital in excess of par
$5,000,000
Retained earnings
$4,000,000
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