Earnhart Corporation has outstanding 3,000,000 ordinary shares with a par value of $10 each. The balance in its retained earnings account at January 1, 2019, was $24,000,000, and it then had Share Premium of $5,000,000. During 2019, the company's net income was $4,700,000. A cash dividend of $0.60 per share was declared on May 5, 2019, and was paid June 30, 2019, and a 6% share dividend was declared on November 30, 2019, and distributed to shareholders of record at the close of business on December 31, 2019. You have been asked to advise on the proper accounting treatment of the share dividend.
The existing shares of the company are quoted on a national securities exchange. The market price of the shares has been as follows.
October 31, 2019.........................$31
November 30, 2019......................$34
December 31, 2019......................$38
Instructions
a. Prepare the journal entry to record the declaration and payment of the cash dividend.
b. Prepare the journal entry to record the declaration and distribution of the share dividend.
c. Prepare the equity section (including schedules of retained earnings and share premium) of the statement of financial position of Earnhart Corporation for the year 2019 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the share dividend, and add separately appropriate comments or explanations regarding the basis chosen.