If preferred stock is noncumulative determine the

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If preferred stock is noncumulative, determine the dividends paid to each class of stock for each of the three years. Stock Dividends and Splits Dividends need not be paid in cash. Many companies pay dividends in the form of additio shares of stock. Companies can also distribute additional shares to their stockholder'S. with a sn split. We cover both of these distributions in this section. Stock Dividends When dividends are paid in the form of the company's stock, retained earnings are redu and contributed capital is increased. However, the amount by which retained earnings reduced depends on the proportion of the outstanding shares distributed to the total outst ing shares on the dividend distribution date. Exhibit 8.2 illustrates two possibilities depeno- ing on whether stock dividends are classified as small stock dividends or large stock dirs- dends. The break point between small and large is 20-25% of the outstanding shares. the number of additional shares issued as a stock dividend is so great that it could materia;.:"_ reduce share price, the transaction is akin to a stock split. The 20-25% guideline is used a rule of thumb to distinguish material stock price effects. For small stock dividends, retained earnings are reduced by the market value of the share! distributed (dividend shares X market price per share), and par value and contributed cap- together are increased by the same amount. For large stock dividends, retained earnings reduced by the par value of the shares distributed (dividend shares X par value per share and common stock is increased by the same amount (no change to additional paid-in capi To illustrate the financial statement effects of stock dividends, assume that BearingP - has 1 million shares of $5 par common stock outstanding. It then declares a small stock di- - dend of 15% of the outstanding shares (1,000,000 shares X 15% = 150,000 shares) w
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Module 8 I Equity Recognition and Owner Financing 8-18 - ----------- --- =xHIBIT 8.2 Analysis of Stock Dividend Effects Percentage of Outstanding Shares Distributed Retained Earnings Contributed Capital Less than 20-25% small stock dividend treated as a dividend) Reduce by market value of shares distributed Common stock increased by: Dividend shares x Par value per share; Additional paid-in capital increased for the balance Reduce by par value of shares distributed More than 20-25% .age stock dividend treated as a stock split) Common stock increased by: Dividend shares x Par value per share ,/ market price of the stock is $30 per share. This small stock dividend has the following cial statement effects: Net Income Balance Sheet Income Statement Noncash Assets Cash saction Asset Liabil- Contrib. Earned ities + Capital + Capital Rev- enues Expen- ses +750,000 ) Common ( Stock -$4,500,000 +$3,750,000 Retained \ Additional Earnings Paid-In Capital = ibute <z: ,000 es with :=: ;narket ~ e of $4.5 as a ::;-aaJ1 stock - end = I ( ----------------------------------------------------------------------------------------------------------------'------------------------------------------------------------ company reduces retained earnings by $4,500,000, which equals the market value of the stock dividend (150,000 shares x $30 market price per share). The increase in contributed ital is split between the par value of $750,000 (150,000 shares X $5 par value) and additional - -in capital ($3,750,000). Similar to cash dividend payments, stock dividends, whether large
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