Beacon Corporation issued a 4 percent stock dividend on 30,500 shares of its $7 par common stock. At the time of the dividend, the market value of the stock was $22 per share. Required a. Compute the amount of the stock dividend. b. Show the effects of the stock dividend on the financial statements using a horizontal statements model. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element was not affected by the event.

dividend stock amount $671,000

No changes in the accounting equation. Only the composition of the Equity is changed

Cash flow: Financial Activity

Explanation:

30,500 shares x $22 each =    671,000

common stock 30,500 x $7 = 213,500

additional paid-in                      457,500‬

Assets   =  Liabilities +  Equity

Assets   =  Liabilities + Common Stock + Additional Paid-in + Retained  Earnings

   0      =         0 +          213,500 +  457,500 - 617,000

In the end the total amount for assets, liaibity and equity do not change.

Cash flow: it is a financing activity as the company gives this dividedsn in return of the initial investment made by the shareholders

A) Compute the amount of the stock dividend.

stock dividend = 30,500 shares x 4% x $22 market value = $26,840 (corresponds to 1,220 shares)

B) Show the effects of the stock dividend on the financial statements using a horizontal statements model.

balance sheet:

assets                  =  liabilities +                             equity

N/A                          N/A    +   common stocks + APIC - retained earnings

                                                     $8,540       + $18,300     - $26,840

income statement:

revenue         -           costs               =             income

N/A                             N/A                                 N/A

cash flow:

amount                 activity

N/A                        FA (financing activity)

Explanation:

In the balance sheet, neither assets nor liabilities are affected, and shareholders' equity is rearranged: retained earnings decreases (dividends are paid using retained earnings) while common stock and additional paid in capital increase by the amounts equivalent to 1,220 new stocks issued.

Both the income statement and cash flow statement are not affected in any way, but the noncash transaction must be reported as a financing activity, with no cash flow is associated to it.  

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