Dai Corporation has outstanding $2 million no par value common shares that were issued at $10 per share. The balances at January 1, 2012, were $21 million in its retained earnings account; $4.3 million in its contributed surplus account; and $1.1 million in its accumulated other comprehensive income account. During 2012, the company’s net income was $3.2 million and comprehensive income was $3,350,000. A cash dividend of $0.70 a share was paid on June 30, 2012, and a 5% stock dividend was distributed to shareholders of record at the close of business on December 31, 2012. You have been asked to give advice on how to properly account for the stock dividend. The existing company shares are quoted on a national stock exchange. The shares’ market price per share has been as follows:
Oct. 31, 2012 ................ $31
Nov. 30, 2012 ................. 33
Dec. 31, 2012 ................ 38
Average price over the two-month period ..... 35
(a). Prepare a journal entry to record the cash dividend.
(b). Prepare a journal entry to record the stock dividend.
(c). Prepare the shareholders’ equity section (including a schedule of retained earnings) of the company balance sheet for the year 2012 based on the information given. Write a note to the financial statements that states the accounting basis for the stock dividend and include separate comments on why this basis was chosen.
(d). Prepare a statement of changes in shareholders’ equity for the year 2012.