The owners’ equity accounts for Octagon Transnational are as follows:
Common Stock [$2 par value] $20,000
Capital Surplus 360,000
Retained Earnings 1,173,000
Total owners’ equity $1,553,000
a. If Octagon’s stock currently sells for $50 per share and Octagon declares a 10%
stock dividend how many new shares will be distributed? How would each equity
account change?
b. If Octagon’s stock currently sells for $50 per share and Octagon declares a 25%
stock dividend how many new shares will be distributed? How would each equity
account change?
To determine the number of new shares that will be distributed and how each equity account will change, we need to follow a few steps:
a. With a 10% stock dividend:
1. Calculate the dividend amount: Total owners’ equity * dividend rate = $1,553,000 * 10% = $155,300.
2. Calculate the market value of the dividend: Dividend amount / stock price = $155,300 / $50 = 3,106 shares (rounded to the nearest whole number).
3. Adjust the equity accounts:
- Common Stock (par value of $2): Increase by 3,106 * $2 = $6,212.
- Capital Surplus: No change since the stock dividend is considered a transfer from retained earnings.
- Retained Earnings: Decrease by $155,300.
- Total owners’ equity: No change since the total value remains the same.
b. With a 25% stock dividend:
1. Calculate the dividend amount: Total owners’ equity * dividend rate = $1,553,000 * 25% = $388,250.
2. Calculate the market value of the dividend: Dividend amount / stock price = $388,250 / $50 = 7,765 shares (rounded to the nearest whole number).
3. Adjust the equity accounts:
- Common Stock (par value of $2): Increase by 7,765 * $2 = $15,530.
- Capital Surplus: No change since the stock dividend is considered a transfer from retained earnings.
- Retained Earnings: Decrease by $388,250.
- Total owners’ equity: No change since the total value remains the same.
In summary, for a 10% stock dividend, 3,106 new shares will be distributed, and for a 25% stock dividend, 7,765 new shares will be distributed. The Common Stock account will increase accordingly, while Capital Surplus will remain the same. Retained Earnings will decrease by the dividend amount in each scenario. Total owners’ equity will remain unchanged.