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Accounting Case - Stock Dividends and Stockholders

CA15-5 (Stock Dividends)
Kitakyushu Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kitakyushu wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board dividend.

Instructions:

(a) The first topic the vice president wishes to discuss is the nature of the stock dividend to the recipient. Discuss the case against considering the stock dividend as income to the recipient,
(b) The other topic for discussion is the propriety of issuing the stock dividend to all "stockholders of record" or to "stockholders of record exclusive of shares held in the name of the corporation as treasury stock." Discuss the case against issuing stock dividends on treasury shares. (AICPA adapted).
(c) Which has more value to a shareholder - a stock dividend or a cash dividend? Why?

Problem:
O2) On January 1, 2008, Bosco Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in an $800,000 increase in the January 1, 2008 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Bosco in its 2008

a. retained earnings statement as a $560,000 addition to the beginning balance.
b. income statement as a $560,000 cumulative effect of accounting change.
c. retained earnings statement as an $800,000 addition to the beginning balance.
d. income statement as an $800,000 cumulative effect of accounting change.

O3). On January 1, 2007, Gregg Corp. acquired a machine at a cost of $500,000. It is to be depreciated on the straight-line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Gregg's 2007 financial statements. The oversight was discovered during the preparation of Gregg's 2008 financial statements. Depreciation expense on this machine for 2008 should be

a. $0.
b. $100,000.
c. $125,000.
d. $200,000.

Solution Summary

This solution provides explanations for various questions regarding the implications of authorizing part of a common stock dividend to common stockholders.

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