The equity of Howell Company at July 31, 2012 is presented below:

On August 1, 2012, the board of directors of Howell declared a 15% share dividend on ordinary shares, to be distributed on September 15th.The market price of Howell's ordinary shares was $35 on August 1, 2012, and $38 on September 15, 2012.What is the amount of the debit to retained earnings as a result of the declaration and distribution of this share dividend?

Question

The equity of Howell Company at July 31, 2012 is presented below:

On August 1, 2012, the board of directors of Howell declared a 15% share dividend on ordinary shares, to be distributed on September 15th.The market price of Howell's ordinary shares was $35 on August 1, 2012, and $38 on September 15, 2012.What is the amount of the debit to retained earnings as a result of the declaration and distribution of this share dividend?

Quizplus · Accepted Answer

To calculate the amount of the share dividend:
- First, we need to determine the number of shares outstanding before the dividend. 
- Then, we can calculate the number of additional shares issued by multiplying that number by the percentage of the dividend. 
- Finally, we can calculate the market value of those additional shares by multiplying the number of shares issued by the market price per share on the distribution date.
 
Number of shares outstanding before the dividend = 400,000
Number of new shares issued = 15% x 400,000 = 60,000
Market value of new shares = 60,000 x $38 = $2,280,000
 
The debit to retained earnings is equal to the market value of the new shares issued, which is $2,280,000. However, the company needs to also account for the increase in share capital resulting from the issuance of new shares. The increase in share capital is equal to the par value of the new shares (assuming par value exists), which is typically a small amount. Therefore, the total debit to retained earnings would be slightly less than $2,280,000. Choice B is the closest answer option.

The Equity of Howell Company at July 31, 2012 Is