Question

The stockholders’ equity section of Waterway Corporation consists of common stock ($10 par) $2,050,000 and retained earnings $520,000. A 10% stock dividend (20,500 shares) is declared when the market price per share is $14. Show the before-and-after effects of the dividend on the following.

(a) The components of stockholders’ equity.
(b) Shares outstanding.
(c) Par value per share.

Answer 1

The stockholders' equity section of Waterway Corporation consists of common stock ($10 par) $2,050,000 and retained earnings $520,000. A 10% stock dividend (20,500 shares) is declared when the market price per share is $14. The before-and-after effects of the dividend are as follows...

Step-by-step explanation:

(a) Before the stock dividend, the components of stockholders' equity in Waterway Corporation are common stock ($10 par) $2,050,000 and retained earnings $520,000. After the stock dividend, the common stock would increase by 20,500 shares ($10 x 20,500 = $205,000) and retained earnings would decrease by the same amount since it is used to finance the dividend. So, the new components of stockholders' equity would be common stock ($10 par) $2,255,000 and retained earnings $315,000.

(b) Before the stock dividend, the shares outstanding in Waterway Corporation are not provided in the question. After the stock dividend, the number of shares outstanding would increase by 20,500 shares.

(c) The par value per share of the common stock remains the same before and after the stock dividend, which is $10 per share.