Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: Common stock, $6 par, 500,000 shares authorized 55,000 shares issued and outstanding $ 330,000 Paid-in capital in excess of par - common 440,000 $ 770,000 Retained earnings 1,400,000 Total Stockholders' Equity $ 2,170,000 On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share. How will the issuance of the stock dividend affect the financial statements

Question

13-10-2020
Business

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Gilligan Corporation was established on February 15, Year 1. Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock. As of December 30, Year 1, Gilligan's stockholders' equity accounts report the following balances: Common stock, $6 par, 500,000 shares authorized 55,000 shares issued and outstanding $ 330,000 Paid-in capital in excess of par - common 440,000 $ 770,000 Retained earnings 1,400,000 Total Stockholders' Equity $ 2,170,000 On December 31, Year 1, Gilligan decides to issue a 5% stock dividend. At the time of issue, the market price of the stock was $22 per share. How will the issuance of the stock dividend affect the financial statements

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Answer: Decrease the retained earnings account by $60500, increase the common stock account by $16500 and increase paid in capital in excess of par-common account by $44000.

Explanation:

From the scenario above, the issuance of the stock dividend affect the financial statements in the following way:

The retained earnings account is going to reduce by:

= 55,000 shares × $22 × 5%

= 55,000 × $22 × 0.05

= $60500

Also, the common stock account will increase by:

= 55,000 shares × $6 × 5%

= 55,000 shares × $6 × 0.05

= $16500

Lastly, there'll be an increase in the paid in capital in excess of par common account by

= $60500 – $16500

= $44000