The stockholders' equity accounts of Lawrence Company have the following balances on December 31, 2010.
Common stock, $10 par, 274,000 shares issued and outstanding $2,740,000
Paid-in capital in excess of par 1,200,000
Retained earnings 5,600,000
Shares of Lawrence Company stock are currently selling on the Midwest Stock Exchange at $39.
Prepare the appropriate journal entries for each of the following. (a) and (b) and provide answer for (c). (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
(a) A stock dividend of 5% is declared and issued.
Description/Account Debit Credit
Paid-in Capital in Excess of ParCashPaid-in Capital in Excess of Stated ValueDividends PayableRetained EarningsCommon StockCommon Stock Dividend Distributable
Retained EarningsCommon Stock Dividend DistributableCommon StockPaid-in Capital in Excess of ParPaid-in Capital in Excess of Stated ValueDividends PayableCash
Paid-in Capital in Excess of Stated ValuePaid-in Capital in Excess of ParCommon StockRetained EarningsDividends PayableCashCommon Stock Dividend Distributable
(To record declaration)
Dividends PayableCashRetained EarningsPaid-in Capital in Excess of ParPaid-in Capital in Excess of Stated ValueCommon StockCommon Stock Dividend Distributable
Dividends PayableCashPaid-in Capital in Excess of ParCommon StockRetained EarningsCommon Stock Dividend DistributablePaid-in Capital in Excess of Stated Value
(To record distribution of shares)
(b) A stock dividend of 100% is declared and issued.
Description/Account Debit Credit
Paid-in Capital in Excess of ParCommon Stock Dividend DistributableDividends PayableRetained EarningsPaid-in Capital in Excess of Stated ValueCommon StockCash
Common StockRetained EarningsDividends PayablePaid-in Capital in Excess of Stated ValueCashCommon Stock Dividend DistributablePaid-in Capital in Excess of Par
(To record declaration)
Retained EarningsPaid-in Capital in Excess of ParPaid-in Capital in Excess of Stated ValueCashDividends PayableCommon Stock Dividend DistributableCommon Stock
Common StockPaid-in Capital in Excess of Stated ValueCommon Stock Dividend DistributablePaid-in Capital in Excess of ParCashRetained EarningsDividends Payable
(To record distribution of shares)
(c) How much of a reduction in retained earnings results when a 2-for-1 stock split is declared and issued?
$
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To solve this problem, we need to understand the concept of a stock split and how it affects the retained earnings of a company.
A stock split is a corporate action that increases the number of shares outstanding without changing the total value of the shares. In a 2-for-1 stock split, each existing share is split into two new shares. This means that if a company had 10,000 shares before the split, after the split it will have 20,000 shares.
When a stock split is declared and issued, there is no actual change in the company's assets or liabilities. However, the number of outstanding shares increases, which has an impact on the stockholders' equity section of the balance sheet.
To calculate the reduction in retained earnings resulting from a 2-for-1 stock split, we need to determine the value of the stock before and after the split.
Before the split:
- Number of shares issued and outstanding: 274,000
- Par value per share: $10
- Total Common Stock: 274,000 shares * $10 par value = $2,740,000
After the split:
- Number of shares issued and outstanding: 274,000 shares * 2 = 548,000
- Par value per share: $10
- Total Common Stock: 548,000 shares * $10 par value = $5,480,000
The reduction in retained earnings resulting from the stock split is the difference between the total common stock before and after the split.
Reduction in Retained Earnings = Total Common Stock before split - Total Common Stock after split
= $2,740,000 - $5,480,000
= -$2,740,000
Therefore, the reduction in retained earnings resulting from the 2-for-1 stock split is $2,740,000.