Question: Entity A is authorized 10 million common shares and has no treasury stock. The stockholders' equity section of its balance sheet consists of common stock ($5 par) $5,000,000 and retained earnings $30,000,000. On September 15, 2018, Entity A's board of directors declared a 10% stock dividend on common shares. The shares are to be distributed on October 10, 2018, to shareholders of record on October 1, 2018. The market price per share on the date of declaration (Sept. 15) was $24 while the market price on the date of distribution (Oct. 10) was $22.
Entity A uses an account called Common Stock Dividends Distributable (Issuable) where appropriate.
A. Prepare any necessary journal entries to record the above transactions.
B. Prepare two partial balance sheets (stockholders' equity section) including the number of authorized, issued, and outstanding shares, one before (9/14) and one after (10/11) the stock dividend.
Entity A
Partial Balance Sheet
At September 14, 2018
Entity A
Partial Balance Sheet
At October 11, 2018
C. Does it make sense to value the additional shares at a market value prior to the declaration of the stock dividend? What would you expect to happen to the share price after the stock dividend?
D. Explain why a company might issue a stock dividend? Are stock dividends taxable? Do they consume cash? Do they increase or decrease total stockholders' equity? Answer each question.