Balance Sheet and Dividend Analysis | Milton Corporation | CFA Level 1 Exam

Milton Corporation's Shareholders' Equity Calculation with 10% Stock Dividend

Prev Question Next Question

Question

Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash $725,000 -

Accounts receivable (net) $1,640,000

Inventories $2,945,000 -

Total current assets $5,310,000 -

Accounts payable $1,236,000 -

Accrued liabilities $831,000 -

Total current liabilities $2,067,000

The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997.

Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E.

A

The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, the total shareholders' equity remains the same.

To determine the impact of the dividend declaration and distribution on Milton Corporation's total shareholders' equity, we need to understand the effect of both cash dividends and stock dividends.

  1. Cash Dividend: When a cash dividend is declared, it represents a distribution of earnings or retained earnings to shareholders. It leads to a reduction in the company's retained earnings and cash. In this case, Milton Corporation declared a quarterly cash dividend of $200,000.

The impact on the balance sheet is as follows:

  • Cash decreases by $200,000.
  • Retained earnings decrease by $200,000.

Since the cash dividend reduces both cash and retained earnings, the total shareholders' equity remains unchanged. Therefore, if Milton Corporation had paid a cash dividend, the total shareholders' equity would remain the same.

  1. Stock Dividend: A stock dividend involves distributing additional shares of the company's stock to existing shareholders. It does not involve the outflow of cash. Instead, it reallocates a portion of retained earnings to share capital and additional paid-in capital.

The impact on the balance sheet is as follows:

  • Share capital and additional paid-in capital increase.
  • Retained earnings decrease by the fair value of the stock dividend.

Since a 10% stock dividend is declared, it means that for every ten shares held by a shareholder, they receive an additional share. The fair value of the stock dividend is not provided in the given information. However, for the purpose of this calculation, we can assume the fair value of the stock dividend to be the same as the cash dividend amount, which is $200,000.

The impact on the balance sheet is as follows:

  • Share capital and additional paid-in capital increase by $200,000.
  • Retained earnings decrease by $200,000.

As a result of the stock dividend, the total shareholders' equity increases by the same amount as the cash dividend, which is $200,000.

Given that the question asks about the impact on total shareholders' equity if the dividend declared had been a 10% stock dividend instead of a cash dividend, we can conclude that the total shareholders' equity would have increased by the dividend declaration and remained unchanged by the dividend distribution.

Therefore, the correct answer is B. Increased by the dividend declaration and unchanged by the dividend distribution.

Prev Question Next Question