On October 31 the stockholders\' equity section of Lynch Company\'s balance shee

Question

On October 31 the stockholders' equity section of Lynch Company's balance sheet consists of common stock $648,000 and retained earnings $400,000. Lynch is considering the following two courses of action: (1) declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding or (2) effecting a 2-for-1 stock split that will reduce par value to $4 per share. The current market price is $14 per share.

Complete the tabular summary of the effects of the alternative actions on the company's stockholders' equity, outstanding shares.

..................Before Action ...................After Stock Dividend ................After Stock Split
Stockholders' equity
Paid-in capital ........... 648000... ............____?...........648000
Retained earnings ......400000 ..............______?..........400000
Total stockholders' equity1048000.........1048000....... $ 1048000
Outstanding shares.....___?........____?.......____?

Explanation / Answer

Dunno what tabular summary you want, but the calculation is as follows: (1) declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding common stock $648,000 with $8 par value means you started off with 81,000 shares issued and outstanding 5% stock dividend means there will be 81,000 x 5% = 4,050 new shares issued; entry is: Dr Retained earnings $56,700 (4,050 shares x $14) Cr Common stock $32,400 (4,050 x par value of $8) Cr Paid-in capital in excess of par $24,300 Stockholders' equity after stock dividend: Common stock 85,050 shares of $8 par value issued and outstanding $680,400 Paid-in capital in excess of par $24,300 Retained earnings $343,300 Total stockholders' equity $1,048,000 (2) effecting a 2-for-1 stock split that will reduce par value to $4 per share. A stock split needs no journal entry. You double the issued shares and halve the par value Stockholders' equity after stock split: Common stock 162,000 shares of $4 par value issued and outstanding $648,000

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