Question

The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $5 per share.

Common stock (50,000 shares at $2 par) $ 100,000
Capital in excess of par 100,000
Retained earnings 250,000
Total equity $ 450,000
The firm intends to first declare a 10 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings).

Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)


Western Pipe Co.

After Srock Dividend

common stock:

Capital in excess of par:

Retained earnings:

Total equity:

Western Pipe Co.

After Stock Dividend

Common stock:

Capital in excess of par:

Retained earnings:

Total equity:

Answer 1

The 10 percent stock dividend increases the common stock balance by $10,000 and decreases retained earnings by $25,000, maintaining the total equity at $450,000. After the 20-cent cash dividend, retained earnings decrease by $11,000 and total equity becomes $439,000.

Step-by-step explanation:

We will first calculate the impact of 10 percent stock dividend on the balance sheet. The company has 50,000 shares outstanding, and a 10% stock dividend will result in an additional 5,000 shares (50,000 x 0.10). The par value per share is $2, so the common stock will increase by $10,000 (5,000 shares x $2). The total common stock after the dividend will be $110,000 ($100,000 + $10,000), since the additional shares add to the common stock at par value.

The capital in excess of par remains unchanged because the additional shares are accounted for at the par value and do not affect the excess capital account. The retained earnings is reduced by the market value of the dividend, not the par value (5,000 shares x $5 market price = $25,000). Hence, the retained earnings after the stock dividend will be $225,000 ($250,000 - $25,000). The total equity remains the same at $450,000 since the stock dividend is a reallocation within shareholders' equity.

Next, we'll calculate the impact of the 20-cent cash dividend. With now 55,000 shares outstanding after the stock dividend, a 20-cent cash dividend will result in a total cash dividend payment of $11,000 (55,000 shares x $0.20). The retained earnings will therefore decrease by this amount to $214,000 ($225,000 - $11,000). The total equity will decrease to $439,000 ($450,000 original total equity - $11,000 cash dividends). The common stock and capital in excess of par accounts remain unchanged after the cash dividend.

After Stock Dividend and After Cash Dividend:

• Common stock: $110,000
• Capital in excess of par: $100,000
• Retained earnings: $225,000 / $214,000
• Total equity: $450,000 / $439,000

Answer 2

The Western Pipe Company

Western Pipe Co.

1. After Stock Dividend

Common stock (55,000 shares at $2 par) $110,000

Capital in excess of par 100,000

Retained earnings 240,000

Total equity $450,000

2. After a 20-cent Cash Dividend:

Common stock (55,000 shares at $2 par) $110,000

Capital in excess of par 100,000

Retained earnings 229,000

Total equity $439,000

Step-by-step explanation:

Current market price of stock = $5 per share

Common stock (50,000 shares at $2 par) $100,000

Capital in excess of par 100,000

Retained earnings 250,000

Total equity $450,000

Stock dividend = 50,000 * 10% = 5,000 shares

New common stock = 55,000 shares

Retained earnings will be reduced to $240,000 ($2 * 5,000)

Cash dividend = $0.20 * 55,000 = $11,000

Retained earnings will be reduced to $229,000 ($240,000 - $11,000)