Entries for Stock Dividends
Organic Life Co. is an HMO for businesses in the Portland area. The following account balances appear on the balance sheet of Organic Life Co.: Common stock (250,000 shares authorized), $125 par, $17,500,000; Paid-In Capital in excess of par—common stock, $560,000; and Retained earnings, $75,496,000. The board of directors declared a 3% stock dividend when the market price of the stock was $132 a share. Organic Life Co. reported no income or loss for the current year.
Determine the following amounts before the stock dividend was declared: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity.
Total paid-in capital $
Total retained earnings $
Total stockholders' equity $
c. Determine the following amounts after the stock dividend was declared and closing entries were recorded at the end of the year: (1) total paid-in capital, (2) total retained earnings, and (3) total stockholders' equity.
Total paid-in capital $
Total retained earnings $
Total stockholders' equity $
To determine the amounts before and after the stock dividend, we need to understand the concept of stock dividends and how they affect a company's financial statements.
A stock dividend is a distribution of additional shares of a company's stock to its existing shareholders. It is usually expressed as a percentage of the existing shares held by shareholders. In this case, Organic Life Co. declared a 3% stock dividend.
Before the stock dividend was declared, let's calculate the amounts:
1) Total paid-in capital:
Total paid-in capital consists of the common stock and the paid-in capital in excess of par.
Common stock has a par value of $125 per share and there are 250,000 authorized shares. So, the common stock balance is calculated as:
Common stock = Number of Authorized Shares * Par Value
Common stock = 250,000 * $125 = $31,250,000
The paid-in capital in excess of par is given as $560,000.
Total paid-in capital = Common stock + Paid-in Capital in Excess of Par
Total paid-in capital = $31,250,000 + $560,000 = $31,810,000
Therefore, the total paid-in capital before the stock dividend was declared is $31,810,000.
2) Total retained earnings:
Retained earnings represent the accumulated profit or loss of a company from previous years. In this case, Organic Life Co. reported no income or loss for the current year, so the retained earnings balance remains the same as the beginning balance.
Total retained earnings = $75,496,000
3) Total stockholders' equity:
Total stockholders' equity is the sum of total paid-in capital and total retained earnings.
Total stockholders' equity = Total paid-in capital + Total retained earnings
Total stockholders' equity = $31,810,000 + $75,496,000 = $107,306,000
Therefore, the total stockholders' equity before the stock dividend was declared is $107,306,000.
Now, let's calculate the amounts after the stock dividend was declared and closing entries were recorded:
1) Total paid-in capital:
After the stock dividend, the number of shares will increase by 3%.
Number of additional shares = 3% of 250,000 shares = 0.03 * 250,000 = 7,500 shares
The market price of the stock is given as $132 a share, so the value of the additional shares is:
Value of additional shares = Number of additional shares * Market price
Value of additional shares = 7,500 * $132 = $990,000
Total paid-in capital = Common stock + Paid-in Capital in Excess of Par + Value of additional shares
Total paid-in capital = $31,250,000 + $560,000 + $990,000 = $32,800,000
Therefore, the total paid-in capital after the stock dividend and closing entries are recorded is $32,800,000.
2) Total retained earnings:
Since Organic Life Co. reported no income or loss for the current year, the retained earnings balance remains the same.
Total retained earnings = $75,496,000
3) Total stockholders' equity:
Total stockholders' equity is the sum of total paid-in capital and total retained earnings.
Total stockholders' equity = Total paid-in capital + Total retained earnings
Total stockholders' equity = $32,800,000 + $75,496,000 = $108,296,000
Therefore, the total stockholders' equity after the stock dividend and closing entries are recorded is $108,296,000.
To summarize:
Before the stock dividend was declared:
Total paid-in capital: $31,810,000
Total retained earnings: $75,496,000
Total stockholders' equity: $107,306,000
After the stock dividend was declared and closing entries were recorded:
Total paid-in capital: $32,800,000
Total retained earnings: $75,496,000
Total stockholders' equity: $108,296,000