Many corporations have automatic dividend reinvestment plans. Individual shareholders may elect not to receive their cash dividends. Instead, an equivalent amount of cash is invested in additional stock (at the current market value) that is issued to the shareholder.

Royal Dutch Shell had total assets of $345.3 billion at December 31, 2011, and declared a quarterly cash dividend of $.42 per share in the fourth quarter of 2011.

1. Suppose holders of 15% of the company’s 6.2 billion outstanding shares decided to reinvest in the company under an automatic dividend reinvestment plan instead of accepting the cash. The market price of the shares on issuance was $50 per share. Prepare the journal entry or entries for these transactions. For purposes of this problem assume Shell shares have no par and no stated value.

2. One of the members of your investment club expressed the following opinion: Stockholders participating in dividend reinvestment programs pay taxes on dividends not really received. If a company would refrain from paying dividends only to take them back as reinvestments, it would save paperwork, and the stockholder would save income tax. Do you agree with these remarks? Explain in detail.