Gateway Corporation has outstanding 200,000 common shares that were issued at $10 per share. The balances at January 1, 2017 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 2017, Gateway's net income was $3.2 million and comprehensive income was $3,350,000. A cash dividend of $0.70 per share was declared and paid on June 30, 2017, and a 5% stock dividend was declared and distributed to shareholders of record at the close of business on December 31, 2017. You have been asked to give advice on how to properly account for the stock dividend. The existing company shares are traded on a national stock exchange. The shares' market price per share has been as follows:
Oct. 31, 2017 ............................................. $31
Nov. 30, 2017 .............................................. 33
Dec. 31, 2017 .............................................. 38
Average price over the two-month period ............ 35
Instructions
(a) Prepare a journal entry to record the cash dividend.
(b) Prepare a journal entry to record the stock dividend.
(c) Prepare Gateway's shareholders' equity section (of the statement of financial position) for the year 2017 based on the information given. Prepare a schedule outlining the activity to the Retained Earnings account for the year. Write a note to the financial statements that states the accounting basis for the stock dividend.
(d) Prepare a statement of changes in shareholders' equity for 2017.