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10.4-7) Peter’s House of Flowers has decided to split its common stock two–for–one, but is unsure whether
they would like to reduce or retain the par value of the common stock. Currently, Peter’s House of
Flowers has 10,000 shares of $10 par value common stock outstanding with a market value of $60 per
share. Under option A, Peter’s House of Flowers would retain par value at $10 per share and under
option B, Peter’s House of Flowers reduce par value. Under each option, determine the following:
Option A
1. ________ How much is the common stock account increased by?
2. ________ How much is the retained earnings account increased by?
3. ________ How much is the total stockholders’ equity account increased by?
4. ________ What is the new expected market value of the common stock?
5. What is the journal entry to account for the stock split under option A?
Option B
1. ________ How much is the common stock account increased by?
2. ________ How much is the retained earnings account increased by?
3. ________ How much is the total stockholders’ equity account increased by?
4. ________ What is the new expected market value of the common stock?
5. What is the journal entry to account for the stock split under option B?
Answer:
Learning Objective 10.5 Questions
10.5-1) Which statement is false?
A) Typically the par value of common stock is adjusted for a stock split.
B) There are no costs to the company when issuing stock splits or stock dividends.
C) In both a stock split and a stock dividend, the shareholders have the same ownership interest after the
stock split or stock dividend as they had before the stock split or stock dividend.
D) Ignoring the effect of fractional shares, both stock splits and stock dividends issue shares of common
stock without any additional cash payments.
E) Stock splits are often used to keep a company’s stock price low enough to maintain its price within a
reasonable trading range.
10.5-2) Biscuit News has 700,000 shares authorized and 150,000 shares issued and outstanding of $3 par
value common stock. The current market price of the stock is $50 per share. On December 1, 20X9, the
company declared and issued a 40% stock dividend. After the stock dividend, determine the new value
for each of the following items:
A) # of Shares Issued Par Value Market Price per Share
210,000 $1.80 $30.00
B) # of Shares Issued Par Value Market Price per Share
210,000 $1.80 $70.00
C) # of Shares Issued Par Value Market Price per Share
210,000 $3.00 $30.00
D) # of Shares Issued Par Value Market Price per Share
210,000 $3.00 $35.71
E) # of Shares Issued Par Value Market Price per Share
430,000 $1.80 $30.00
10.5-3) Martin Group has 500,000 shares authorized and 100,000 shares issued and outstanding of $6 par
value common stock. The current market price of the stock is $40 per share. On January 1, 20X9, the
company declared and issued a 2% stock dividend. What journal entry would the company make on
January 1, 20X9?
A) Retained Earnings 12,000
Common Stock 12,000
B) Retained Earnings 80,000
Common Stock 80,000
C) Retained Earnings 80,000
Common Stock 12,000
Additional Paid–in Capital 68,000
D) Retained Earnings 100,000
Common Stock 100,000
E) Retained Earnings 2,000,000
Common Stock 100,000
Additional Paid–in Capital 1,900,000
10.5-4) Which of the following statements about large stock dividends is true?
A) If the market price of the stock before a 50% stock dividend is $30, the market price after the stock
dividend will be $45.
B) If the market price of the stock before a 50% stock dividend is $30, the market price after the stock
dividend will be $60.
C) A stockholder who owned 50 shares of stock before the stock dividend, will own 100 shares of stock
after the stock dividend.
D) Retained earnings is reduced by the par value of the stock issued.
E) Retained earnings is reduced by the market value of the stock issued.
Table 10–4
Jody, Inc., has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value
common stock. The stock is currently selling for $60 per share.
10.5-5) Referring to Table 10–4, if Jody, Inc., declared and issued a 70% stock dividend, what would be the
effect on the following items after the stock dividend?
A) # of Shares Issued Par Value Market Price per Share
175,000 $5.71 $85.71
B) # of Shares Issued Par Value Market Price per Share
425,000 $2.80 $42.00
C) # of Shares Issued Par Value Market Price per Share
425,000 $2.35 $35.29
D) # of Shares Issued Par Value Market Price per Share
425,000 $4.00 $35.29
E) # of Shares Issued Par Value Market Price per Share
490,000 $1.00 $15.00
10.5-6) Referring to Table 10–4, if Jody, Inc., declared and issued a 30% stock dividend, what journal entry
would the company make?
A) Retained Earnings 210,000
Common Stock 210,000
B) Retained Earnings 300,000
Common Stock 300,000
C) Retained Earnings 4,500,000
Common Stock 4,500,000
D) Retained Earnings 18,000,000
Common Stock 18,000,000
E) No journal entry is necessary.
10.5-7) Referring to Table 10–4, if Jody, Inc., declared and issued a 5% stock dividend, what journal entry
would the company make?
A) Retained Earnings 50,000
Common Stock 50,000
B) Retained Earnings 750,000
Common Stock 750,000
C) Retained Earnings 750,000
Common Stock 50,000
Additional Paid–in Capital 700,000
D) Retained Earnings 140,000
Common Stock 140,000
E) Retained Earnings 2,100,000
Common Stock 140,000
Additional Paid–in Capital 1,960,000
10.5-8) Margaret Dumphy owns 140 shares of the Sylvan Company. On January 13, 20X9, the Sylvan
Company declared and issued a 4% stock dividend. The market price per share of the Sylvan Company’s
stock is $40, and the par value is $1.50 per share. What is the journal entry to be made by the Sylvan
Company with respect to the stock dividend distribution to Margaret Dumphy?
A) Retained Earnings 8.40
Common Stock 8.40
B) Retained Earnings 8.45
Additional Paid–in Capital 192.50
Common Stock 7.50
Cash 193.40
C) Retained Earnings 224.00
Common Stock 7.50
Additional Paid–in Capital 192.50
Cash 24.00
D) Retained Earnings 224.00
Common Stock 224.00
E) Retained Earnings 224.00
Common Stock 8.40
Additional Paid–in Capital 215.60
10.5-9) Referring to Table 10–5, if Barnum Corp. declared and issued a two–for–one stock split, what
journal entry would Ronald Cummings make?
A) Investment in the A1 Resort 12,000
Gain from Stock Split 12,000
B) Investment in the A1 Resort 12,000
Unrealized Gain 12,000
C) Investment in the A1 Resort 12,000
Common Stock 1,600
Gain from Stock Split 10,400
D) Investment in the A1 Resort 1,600
Common Stock 1,600
E) No journal entry is necessary.
10.5-10) Referring to Table 10–5, if Barnum Corp. declared and issued a two–for–one stock split, and later
declared and paid on the same day a cash dividend of $1.00 per share, what journal entry would Ronald
Cummings make in order to record the cash dividend from Barnum Corp.?
A) Cash 800
Dividend Income 800
B) Cash 1,600
Dividend Income 1,600
C) Cash 1,600
Dividend Income 800
Gain from Stock Split 800
D) Investment in the A1 Resort 1,600
Gain from Stock Split 1,600
E) Investment in the A1 Resort 3,200
Cash 800
Gain from Stock Split 3,200
Dividend Income 800
10.5-11) Referring to Table 10–5, if Barnum Corp. declared and issued a 3% stock dividend when the
market price per share was $16, what journal entry would Ronald Cummings make?
A) Investment in the A1 Resort 24
Gain from Stock Dividend 24
B) Investment in the A1 Resort 48
Gain from Stock Dividend 48
C) Investment in the A1 Resort 360
Gain from Stock Dividend 360
D) Investment in the A1 Resort 384
Gain from Stock Dividend 384
E) No journal entry is necessary.
10.5-12) Referring to Table 10–5, assume Barnum Corp. declared and issued a 100% stock dividend.
Subsequently, Ronald Cummings sold all of his holdings in Barnum Corp. for $9 per share. What journal
entry would Ronald Cummings make to record the sale of his shares of the Barnum Corp.?
A) Cash 7,200
Loss on Sale 4,800
Investment in the A1 Resort 12,000
B) Cash 7,200
Unrealized Gain 4,800
Investment in the A1 Resort 12,000
C) Cash 14,400
Gain on Sale 2,400
Investment in the A1 Resort 12,000
D) Cash 14,400
Loss on Sale 9,600
Investment in the A1 Resort 24,000
E) Cash 14,400
Unrealized Gain 4,800
Investment in the A1 Resort 12,000
Gain on Sale 7,200
10.5-13) When a stock dividend is less than 20% of the outstanding shares, generally accepted accounting
principles require the stock dividend be accounted for at its par value.
10.5-14) When shareholders are entitled to stock dividends in amounts equal to fractional units,
corporations issue additional shares for whole units plus cash equal to the market value of the fractional
units.
10.5-15) Stock dividends and stock splits involve additional shares of stock distributed to shareholders
without any cash payment to the firm.
10.5-16) Both stock dividends and stock splits involve a reduction in the par value of the stock.
10.5-17) Stock dividends usually result in the issue of fewer shares than a stock split.
10.5-18) Journal entries must be made on the books of the issuing company for all stock splits and stock
dividends.
10.5-19) In substance, there is absolutely no difference between the 100% stock dividend and the two–for–
one stock split.
10.5-20) Legacy, Inc., has 600,000 shares authorized and 150,000 shares issued and outstanding of its $4
par value common stock. The stock is currently selling for $50 per share. There is $900,000 of additional
paid–in capital and the firm has $3,000,000 of retained earnings.
Prepare the appropriate journal entry for the Legacy, Inc., for each of the alternative events below.
a. 2% stock dividend
b. 100% stock dividend
c. 2 for 1 stock split (Assume 300,000 new shares were exchanged for the old shares)
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10.5-21) Clifflee, Inc., reported the following amounts on its June 30, 2X09 balance sheet:
Preferred stock, $5 par, 10%, 5,000 shares issued and outstanding $ 25,000
Common stock, $1 par, 20,000 shares issued and outstanding 20,000
Additional paid–in capital, common stock 65,000
Total contributed capital $110,000
Retained earnings 20,000
Total stockholders’ equity $130,000
Clifflee, Inc. declared a 25% common stock dividend July 12, when the market value of the stock was $25
and a 30% preferred stock dividend July 13, when the market value of the stock was $50. Both stock
dividends will be distributed on August 31, 2X09.
Required:
1. Journalize the declaration of the 25% common stock dividend and the 30% preferred stock dividend.
2. Journalize the distribution of the 25% common stock dividend and the 30% preferred stock dividend.
3. Prepare the stockholders’ equity section of Clifflee Inc.‘s balance sheet after the effects of the two stock
dividends.
10.5-22) The stockholders’ equity section of the balance sheet for Homes, Inc., follows before the stock
dividend.
Common stock, $1 par, 100,000 shares issued and outstanding $100,000
Additional paid–in capital 50,000
Retained earnings 450,000
Total stockholders’ equity $600,000
Homes, Inc., declared a 5% stock dividend when the market price per share was $10. In the space next to
each account, determine the amounts of each account after the stock dividend was distributed.
_____________ Common stock
_____________ Additional paid–in capital
_____________ Retained earnings
Learning Objective 10.6 Questions
10.6-1) What type of account is the Treasury stock and Additional paid–in capital?
A) Treasury stock Additional paid–in capital
retained earnings retained earnings
B) Treasury stock Additional paid–in capital
stockholders’ equity contra stockholders’ equity
C) Treasury stock Additional paid–in capital
contra stockholders’ equity stockholders’ equity
D) Treasury stock Additional paid–in capital
common stock contra stockholders‘ equity
E) Treasury stock Additional paid–in capital
common stock retained earnings
Table 10–6
Plating General acquired 3,000 of its own shares at $25 per share. The shares are to be held in Treasury.
The par value of Plating General’s common stock is $2.50 per share.
10.6-2) Referring to Table 10–6, if Plating General were to resell all its treasury stock at $28 per share, what
journal entry would Plating General make?
A) Cash 84,000
Additional Paid–in Capital 76,500
Treasury Stock 7,500
B) Cash 84,000
Additional Paid–in Capital 9,000
Treasury Stock 75,000
C) Cash 84,000
Treasury Stock 75,000
Gain on Sale of Treasury Stock 9,000
D) Cash 84,000
Additional Paid–in Capital 67,500
Treasury Stock 7,500
Gain on Sale of Treasury Stock 9,000
E) Cash 84,000
Common Stock 7,500
Treasury Stock 75,000
Gain on Sale of Treasury Stock 1,500