Cash Dividends and Stock Dividends

1. Johnson Corporation began by issuing 100,000 shares of its $1 par common stock for $5 per share. In the first year of operation, Johnson earned net income of $30,000. On March 1, the board of directors declared a dividend of $.10 per share payble on March 25th to all stockholders of record as of March 15. On March 31, the Cash Dividend account was closed to Retained Earnings.

Create the stockholders' equity section of the balance sheet before the dividend. Show the dividend entries on the three dates. Show the stockholders' equity section after the dividend. What is the net effect of a cash dividend?

2. Johnson Corporation began by issuing 100,000 shares of its $1 par common stock for $5 per share. In the first year of operation, Johnson earned net income of $90,000. On March 25th, the corporation declared a 10% stock dividend. On that date, the stock was trading at a market price of $7 per share. The stock dividend was closed to Retained Earnings on March 31.

Journalize the stock dividend, and then show how the stockholders' equity section of the balance sheet would appear after the dividend. Were the stockholders better off after they received the dividend? What is the net effect of a stock dividend?