Bruno's has 7,000 shares outstanding with a par value of £1.00 per share and a market value of £12 per share.The statement of financial position shows £7,000 in the ordinary equity account,£58,000 in the additional paid in capital account and £32,500 in the retained earnings account.The firm just announced a 50% (large)stock dividend.What is the value of the ordinary equity account after the dividend?

Question

Quizplus · Accepted Answer

The stock dividend is 50%, so the number of outstanding shares will increase by 50% of 7,000, which is 3,500. Therefore, the new number of shares outstanding is 10,500 (7,000 + 3,500).

The par value of each share remains the same at £1.00. The new total par value is 10,500 x £1.00 = £10,500.

The additional paid in capital account will not change because a stock dividend does not involve any new cash being injected into the company. The balance remains at £58,000.

The retained earnings account will decrease by the amount of the stock dividend. In this case, the stock dividend is 50%, so the retained earnings account will decrease by 50% of the current balance, which is £32,500 x 50% = £16,250. The new balance in retained earnings is £32,500 - £16,250 = £16,250.

Therefore, the new value of the ordinary equity account is the sum of the par value and retained earnings, which is £10,500 + £16,250 = £26,750.

However, it is important to note that the market value of the shares after the stock dividend may not be exactly £12 per share anymore, as the increase in the number of shares outstanding could affect supply and demand for the stock.

Bruno's Has 7,000 Shares Outstanding with a Par Value of £1.00