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Prepare journal entries for a 10% stock dividend and a formal Statement of Retained Earnings.

Accounting

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2 parts
a

K30,000\text{K}30,000

b

K540,000\text{K}540,000

Step-by-step solution

8 steps

Part a· 3 steps

Calculate the total stock (bonus) dividend amount and record the journal entry.

  1. Calculate the number of ordinary shares to be issued as a stock dividend.

    Total ordinary shares outstanding = 100,000 shares.
    Stock dividend percentage = 10%.

    Number of shares to be issued=10%×100,000 shares=10,000 shares\text{Number of shares to be issued} = 10\% \times 100,000 \text{ shares} = 10,000 \text{ shares}

  2. Determine the value of the stock dividend.

    The par value of ordinary shares is K3 per share.

    Total Stock Dividend Amount=10,000 shares×K3/share=K30,000\text{Total Stock Dividend Amount} = 10,000 \text{ shares} \times \text{K}3/\text{share} = \boxed{\text{K}30,000}

  3. Record the journal entry for the stock dividend.

    \begin{align*} Retained Earnings && K30,000 \ Ordinary Share Capital && && K30,000 \ (To record declaration of 10% stock dividend) \end{align*}

Part b

K540,000\text{K}540,000

Prepare a formal Statement of Retained Earnings for the year ended 31 December 2024.

  1. Start with the beginning Retained Earnings balance.

    Retained Earnings, 1 January 2024 = K480,000.

  2. Add Net Income for the year.

    Net income for the year 2024 = K220,000.

  3. Subtract Cash Dividends declared.

    Cash dividends declared during 2024 = K80,000.

  4. Subtract Stock (Bonus) Dividend declared.

    Stock dividend declared = K30,000 (from part a).

  5. Subtract Appropriation set aside for Resort Expansion Reserve.

    Appropriation set aside for Resort Expansion Reserve = K50,000.

    Coral Sea Resorts Corporation
    Statement of Retained Earnings
    For the Year Ended 31 December 2024

    Retained Earnings, 1 January 2024K480,000Add: Net Income220,000Total available for appropriation700,000Less: Cash Dividends Declared(80,000)Less: Stock Dividend Declared(30,000)Less: Appropriation for Resort Expansion Reserve(50,000)Retained Earnings, 31 December 2024K540,000\begin{array}{l r} \text{Retained Earnings, 1 January 2024} & \text{K}480,000 \\ \text{Add: Net Income} & 220,000 \\ \hline \text{Total available for appropriation} & 700,000 \\ \text{Less: Cash Dividends Declared} & (80,000) \\ \text{Less: Stock Dividend Declared} & (30,000) \\ \text{Less: Appropriation for Resort Expansion Reserve} & (50,000) \\ \hline \text{Retained Earnings, 31 December 2024} & \boxed{\text{K}540,000} \\ \end{array}

Part c

Record the journal entry for the appropriation of K50,000 to the Expansion Reserve.

\begin{align*} Retained Earnings && K50,000 \ Resort Expansion Reserve && && K50,000 \ (To record appropriation of retained earnings for expansion) \end{align*}

Part d

Explain the difference between a cash dividend and a stock dividend in terms of their effect on total shareholders' equity and total assets.

A cash dividend involves the distribution of cash to shareholders. It reduces both total shareholders' equity (specifically Retained Earnings) and total assets (Cash). A stock dividend involves distributing additional shares of the company's own stock to existing shareholders. It does not affect total shareholders' equity or total assets. Instead, it reclassifies an amount from Retained Earnings to Ordinary Share Capital (and potentially Share Premium if the market value is used for large stock dividends, but here par value is used). It changes the composition of equity but not the total amount.

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