Tribec Wireless Inc. had the following shareholders’ equity section as at December 31, 2010:
Common shares, no par value, unlimited number
authorized, 2 million issued and outstanding…………………….$4,000,000
Retained earnings………………………………………………… 1,958,476
Total shareholders’ equity…………………………………………$5,958,476
In 2007 and 2008, Tribec paid a cash dividend of $0.75 per share. In 2009, the company expanded operations significantly and the board of directors decided to retain earnings in the business rather than pay them out as a cash dividend. In lieu of the cash dividend, the board voted to distribute a 10% stock dividend. In December 2010, the company returned to its previous dividend policy and again paid a $0.75 cash dividend.
In 2007, you inherited 5,000 shares of Tribec Wireless. At that time, the shares were trading at $5 per share. Given the tremendous growth in the wireless market, by 2009 when the stock dividend was distributed the company’s shares were trading at $80 per share. After the stock dividend, the share price dropped slightly but has since risen again, and as at December 31, 2010, they were trading at $82 per share.
Required:
a. From Tribec’s perspective, how would the accounting for the stock dividend distributed in 2009 differ from the accounting for the cash dividends paid in the other years?
b. Immediately after the stock dividend, the price of the Tribec shares dropped slightly.
Does this mean the value of the company (and your investment) decreased due to the payment of the stock dividend?
c. Prepare a schedule illustrating the total amount of cash dividends you have received since inheriting the Tribec shares. What is the value of your investment on December 31, 2010?