Final answer:
Hexagon International will issue 3,000 new shares as a 10 percent stock dividend. The new equity account balances will be: Common shares at $33,000; Capital surplus at $293,000; Retained earnings at $519,500; with Total shareholders' equity remaining at $842,500.
Step-by-step explanation:
To determine how many new shares will be distributed as a 10 percent stock dividend, we can calculate it by taking the current number of shares in existence and multiplying by 10 percent. Since the common stock of Hexagon International has a book value of $30,000 and each share has a book value of $1, this indicates there are 30,000 shares ($30,000 / $1 per share). Therefore, 10 percent of 30,000 shares is 3,000 shares that will be distributed as the stock dividend.
After the stock dividend is paid, the equity account balances will change. The common stock balance will increase by the number of shares issued multiplied by the book value per share, which is 3,000 shares times $1 per share, equating to an additional $3,000. However, the value of the issued stock at the market price is 3,000 shares times $37 per share, equaling $111,000. This $111,000 is transferred from retained earnings to capital surplus and common stock accounts. Since we only add $3,000 to the common stock account (reflecting the increase in shares at book value), the remaining $108,000 ($111,000 - $3,000) will be added to the capital surplus. The transactions will not change the total shareholders' equity, only the distribution among the accounts. Hence, the new account balances will be:
- Common shares: $33,000 (initial $30,000 + $3,000 added as book value for new shares)
- Capital surplus: $293,000 (initial $185,000 + $108,000 transferred from retained earnings)
- Retained earnings: $519,500 (initial $627,500 - $108,000 transferred to capital surplus)
- Total shareholders' equity: $842,500 (no change)