Shirley's Restaurants has 35,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $9 per share. The balance sheet shows $112,000 in the capital in excess of par
Account, $35,000 in the common stock account and $68,000 in the retained earnings account. The
ﬁrm just announced a 5 percent (small) stock dividend. What will total owners' equity be after the
Dividend?

Question

Quizplus · Accepted Answer

First, we need to calculate the number of shares to be distributed as a dividend. A 5 percent stock dividend means that for every 20 shares owned, the shareholder will receive one additional share. Therefore, the number of shares to be distributed as a dividend is:

35,000 shares x 5% = 1,750 shares

Next, we need to adjust the common stock and capital in excess of par value accounts to reflect the new shares. The common stock account will increase by the par value of the new shares (1,750 shares x $1.00 par value = $1,750), and the capital in excess of par value account will increase by the difference between the market value and par value of the new shares (1,750 shares x $8.00 market value = $14,000; $14,000 - $1,750 = $12,250).

The new balances in these accounts will be:

Common stock account = $36,750
Capital in excess of par value account = $124,250

Finally, we need to adjust retained earnings to reflect the value of the shares distributed as a dividend. The value of the shares distributed is:

1,750 shares x $9.00 market value = $15,750

Therefore, the new balance in retained earnings will be:

Retained earnings account = $68,000 - $15,750 = $52,250

Total owners' equity is the sum of these three accounts:

$36,750 + $124,250 + $52,250 = $213,250

But remember, the question asks for the owners' equity after the dividend. Therefore, we need to subtract the value of the shares distributed as a dividend from this amount:

$213,250 - $15,750 = $197,500

Therefore, the correct answer is C ($215,000, rounded to the nearest thousand).

Shirley's Restaurants Has 35,000 Shares of Stock Outstanding with a Par