3) on october 31, the stockholders equity section of acme companys balance sheet consists of common stock…

3) on october 31, the stockholders equity section of acme companys balance sheet consists of common stock $600,000 and retained earnings $400,000. eaton is considering the following two courses of action: (1) declaring and distributing a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2 - for - 1 stock split that will reduce par value to $5 per share. the current market price is $15 per share. instructions prepare a tabular summary of the effects of the alternative actions on the companys stockholders equity and outstanding shares. use these column headings: before action, after stock dividend, and after stock split. answer: before action after stock dividend after stock split stockholders equity paid - in capital common stock $600,000 $660,000 $600,000 in excess of par 0 30,000 0 total paid - in capital 600,000 690,000 600,000 retained earnings 400,000 310,000 400,000 total stockholders equity $1,000,000 $1,000,000 $1,000,000 outstanding shares 60,000 66,000 120,000 book value per share $16.67 $15.15* *((beg. com. st. ×1.10)+(beg. sh. ×.10×($15 - $10)+beg. r/e-(beg. sh. × sh. ×1.10))

3) on october 31, the stockholders equity section of acme companys balance sheet consists of common stock $600,000 and retained earnings $400,000. eaton is considering the following two courses of action: (1) declaring and distributing a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2 - for - 1 stock split that will reduce par value to $5 per share. the current market price is $15 per share. instructions prepare a tabular summary of the effects of the alternative actions on the companys stockholders equity and outstanding shares. use these column headings: before action, after stock dividend, and after stock split. answer: before action after stock dividend after stock split stockholders equity paid - in capital common stock $600,000 $660,000 $600,000 in excess of par 0 30,000 0 total paid - in capital 600,000 690,000 600,000 retained earnings 400,000 310,000 400,000 total stockholders equity $1,000,000 $1,000,000 $1,000,000 outstanding shares 60,000 66,000 120,000 book value per share $16.67 $15.15* *((beg. com. st. ×1.10)+(beg. sh. ×.10×($15 - $10)+beg. r/e-(beg. sh. × sh. ×1.10))

Answer

Explanation:

Step1: Calculate effects of stock - dividend

  • Common stock: A 10% stock dividend on 60,000 shares of $10 - par value stock. New common - stock amount = $600,000\times(1 + 0.1)=$660,000$.
  • In excess of par: Number of new shares = $60,000\times0.1 = 6,000$. Market price per share is $15 and par value is $10. So, in excess of par = $6,000\times(15 - 10)=$30,000$.
  • Retained earnings: Cost of stock dividend = $6,000\times15=$90,000$. New retained earnings = $400,000-90,000=$310,000$.
  • Outstanding shares: New number of outstanding shares = $60,000\times(1 + 0.1)=66,000$.
  • Book - value per share: Total stockholders' equity remains $1,000,000$. Book - value per share = $\frac{1000000}{66000}\approx$15.15$.

Step2: Calculate effects of stock - split

  • Common stock: A 2 - for - 1 stock split reduces par value to $5 per share, but the total dollar amount of common stock remains the same ($600,000).
  • In excess of par: Remains $0$ as stock splits do not affect paid - in capital in excess of par.
  • Retained earnings: Remains $400,000$ as stock splits do not affect retained earnings.
  • Outstanding shares: New number of outstanding shares = $60,000\times2 = 120,000$.
Before Action After Stock Dividend After Stock Split
Stockholders' equity
Paid - in capital
Common stock $600,000$ $660,000$ $600,000$
In excess of par $0$ $30,000$ $0$
Total paid - in capital $600,000$ $690,000$ $600,000$
Retained earnings $400,000$ $310,000$ $400,000$
Total stockholders' equity $$1,000,000$ $$1,000,000$ $$1,000,000$
Outstanding shares $60,000$ $66,000$ $120,000$
Book value per share $$16.67$ $$15.15$

Answer:

Before Action After Stock Dividend After Stock Split
Stockholders' equity
Paid - in capital
Common stock $600,000$ $660,000$ $600,000$
In excess of par $0$ $30,000$ $0$
Total paid - in capital $600,000$ $690,000$ $600,000$
Retained earnings $400,000$ $310,000$ $400,000$
Total stockholders' equity $$1,000,000$ $$1,000,000$ $$1,000,000$
Outstanding shares $60,000$ $66,000$ $120,000$
Book value per share $$16.67$ $$15.15$