Problem 18-21 Stock dividend and its effect LO4
Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.
The capital accounts for the firm are as follows:



Common stock
(2,000,000 shares at $5 par)
$
10,000,000
Capital in excess of par*
6,000,000
Retained earnings
24,000,000
Net worth
$
40,000,000

*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price - Par Value).
The company's stock is selling for $20 per share. The company had total earnings of $4,000,000 during the year. With 2,000,000 shares outstanding, earnings per share were $2.00. The firm has a P/E ratio of 10.
Requirement 1:
What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts. (Omit the "$" sign in your response.)



Common stock
(2,200,000 shares at $5 par)
$

Capital in excess of par

Retained earnings

Net worth
$

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Have you read your textbook? You are right that part of the entry is 200,000 shares at $5 par. The entry for stock dividends is based on the number of shares issued, with 10% being considered a small stock dividend. If you'd like to post what you think is the correct answer, we will check it for you and confirm your understanding. Thanks.