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

Answer:

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

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)