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aatiyakakar
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Joined: 20 Aug 2009
Location: United States
Online Status: Offline
Posts: 7

Posted: 16 Sep 2009 at 06:49 \| IP Logged

there are several question:

1)   On December 1, 1991, Nilo Corp. declared a property
dividend of marketable securities to be distributed on
December 31, 1991, to stockholders of record on December
15, 1991. On December 1, 1991, the marketable securities
had a carrying amount of $60,000 and a fair value of
$78,000. What is the effect of this property dividend on
Nilo's 1991 retained earnings, after all nominal accounts
are closed?

2)   Pugh Co. reported the following in its statement of
stockholders' equity on January 1, 1990:

Common stock, $5 par value, authorized 200,000 shares,
issued 100,000 shares     $   500,0 00
Additional paid-in capital     1,500,000
Retained earnings        &nbs p; 516,000
     2,516,000
Less treasury stock, at cost, 5,000 shares
(40,000)
Total stockholders' equity     $2,476,000
The following events occurred in 1990:
May 1     -    &nbs p;1,000 shares of treasury stock were sold
for $10,000.
July 9     -    &nbs p;10,000 shares of previously unissued
common stock were sold for $12 per share.
October 1     -    &nbs p;The distribution of a 2-for-1
stock split resulted in the common stock's per share par
value being halved.

Pugh accounts for treasury stock under the cost method.
Laws in the state of Pugh's incorporation protect shares
held in treasury from dilution when stock dividends or
stock splits are declared.
In Pugh's December 31, 1990, statement of stockholders'
equity, the par value of the issued common stock should
be:

bryris
Major Contributor

Joined: 07 Dec 2008
Location: United States
Online Status: Offline
Posts: 624

Posted: 16 Sep 2009 at 12:24 \| IP Logged

Question #1:

The securities must first be marked up to fair value as if they are being sold. Therefore, an 18,000 increase in retained earnings is called for. Then, the distribution reduces retained earnings by the fair value of 78,000. The net effect is a 60,000 reduction (happens to be the carrying amount before the mark up) in RE.

Question #2.

The treasury stock was purchased for $8/sh. When resold at a higher amount, the difference in credited to APIC - treasury stock. Therefore, 2,000 is APIC - TS.

Then the extra stock was issued. Debit cash for 120,000, credit CS at par 50,000 and credit APIC for 70,000.

The stock split merely reduces par per share in half (i.e. is it not affected in the from of a dividend where RE capitalization is required). Therefore, par is 500,000 + 50,000 = 550,000. Per share is $550,000 / [(100,000 + 10,000) * 2] = 2.5/share. Equity is unchanged in total.

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