Answer:
Journal Entries:
Jan 8: Stock split
Jan 8:
Debit Dividends: Preferred $13,500
Debit Dividends: Common Stock $42,000
Credit Dividends Payable $55,500
To record semiannual dividends declared.
July 1:
Debit Dividends Payable $55,500
Credit Cash Account $55,500
To record payment of cash dividends.
Oct. 31:
Debit Dividends: Preferred $13,500
Debit Dividends: Common Stock $21,000
Credit Dividends Payable $34,500
To record semiannual dividends declared.
Oct, 31:
Debit Dividends: Common Stock $300,000
Credit Dividends Payable $300,000
To record 5% stock dividend on common stock.
Dec. 31:
Debit Dividends Payable $34,500
Credit Cash Account $34,500
To record cash dividends paid.
Dec. 31:
Debit Dividends Payable $300,000
Credit Common Stock $300,000
To record the issue of certificates for the common stock dividend.
Explanation:
a) Stock split is a decision to increase the number of outstanding shares and reduce the market price of shares by the same ratio. It makes the shares attractive to most investors. The transaction does not have any financial effect, since the number of shares are increased and the share price is reduced by the same amount.
b) Stock dividend is payment to stockholders in the form of stock and not cash. It involves the issue of additional share certificate to outstanding stockholders as a compensation. The dividend is not usually subject to tax at the time of issue until the shares are sold.
