Final answer:
The journal entry for ABC incorporation's 12% stock dividend on November 15, 2021, involves debiting Retained Earnings and crediting Stock Dividends Distributable and Paid-in Capital in Excess of Par for the par and excess market value, respectively. No entry is needed on the payment date for stock dividends. An investor in Babble, Inc. would calculate the present value of future dividends to determine what to pay for a share.
Step-by-step explanation:
To record the transactions on November 15, 2021, and November 30, 2021, for ABC incorporation, which declared a 12% stock dividend, we need to post entries on both dates. On November 15, the declaration date, ABC corporation's journal entry would debit Retained Earnings for the market value of the dividend and credit Stock Dividends Distributable for the par value of the newly issued shares, with the excess of market value over par value being credited to Paid-in Capital in Excess of Par. Conversely, no entry is needed on November 30, as the distribution of stock dividends doesn't involve a transfer of assets, but if this were a cash dividend, the Payable account would be debited and Cash credited on the payment date.
For the hypothetical case of Babble, Inc., determining what an investor would pay for a share of stock is a matter of discounting the expected future dividends to present value terms. Given that all profits will be paid out as dividends when they occur, an investor would consider the present value of $15 million immediately, $20 million one year from now, and $25 million two years from now to decide the fair price for a share of stock.
The importance of dividends and capital gains as forms of return on investment varies over time based on market conditions, as noted by the changes in dividend percentages and capital gain trends over the decades according to Table 17.2.