Friday, 6 June 2014

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows: Common stock—$10 par value, 150,000 shares authorized, 52,000 shares issued and outstanding $ 520,000 Paid-in capital in excess of par value, common stock 525,000 Retained earnings 675,000 Total stockholders’ equity $ 1,720,000 On February 5, the directors declare a 14% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $40 per share on February 5 before the stock dividend. The stock’s market value is $35 per share on February 28.

The stockholders’ equity of TVX Company at the beginning of the day on February 5 follows:


  Common stock—$10 par value, 150,000 shares authorized,
    52,000 shares issued and   outstanding
$ 520,000  
  Paid-in capital in excess of par value, common stock 525,000  
  Retained earnings 675,000  


  Total stockholders’ equity $ 1,720,000  







On February 5, the directors declare a 14% stock dividend distributable on February 28 to the February 15 stockholders of record. The stock’s market value is $40 per share on February 5 before the stock dividend. The stock’s market value is $35 per share on February 28.

 
Explanation:
Feb. 5
Shares to be issued: 52,000 shares × 14% = 7,280 shares
Retained Earnings: (7,280 × $40) = $291,200
Common Stock Dividend Distributable: 7,280 shares × $10 per share = $72,800
Paid-In Capital in Excess of Par Value, Common Stock: 291,200 – $72,800 = $218,400

2.
One stockholder owned 750 shares on February 5 before the dividend. Compute the book value per share and total book value of this stockholder’s shares immediately before and after the stock dividend of February 5. (Round your "Book value per share" answers to 2 decimal places.)
 
Explanation:
Before After
  Total stockholders’ equity $ 1,720,000   $ 1,720,000
  Issued and distributable shares ÷ 52,000   ÷ 59,280






  Book value per share $ 33.08   $ 29.01












  Shares owned × 750   × 855 *






  Total book value of shares $ 24,808   $ 24,808














*750 shares × 114% = 855 shares.

3.
Compute the total market value of the investor’s shares in part 2 as of February 5 and February 28.  (Round your "Dividend per Preferred Share" answers to 2 decimal places.)
 
Explanation:
February 5 February 28
  Market value per share $ 40    $ 35   
  Shares owned × 750    × 855   






  Total market value of shares owned $ 30,000    $ 29,925   














Note: The total market value of the investor’s holdings is approximately the same for February 5 and February 28. Assuming that the stock dividend is the only value-relevant information/event between February 5th and February 28th, these per share values highlight the lack of value distributed in a stock dividend.