On October 31, the stockholders\' equity section of Omar Company consists of com

Question

On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.

After stock divident
What is common stock
In excesss of par value
total paid in capital
retained earnings
total stockholders equity
outstanding share

Explanation / Answer

After stock dividend

               Stock Dividend is 5% on the 60,000, $10 par value shares outstanding
               = 3,000 shares of $10 each

What is common stock     = 60,000 + 3,000
                                       = 63,000 shares of $10 each
                                      = $630,000
In excesss of par value   Current market price is $14, which is $4 more than par value
                                     Excess paid in capital will be 3,000 x $4
                                     = $12,000
total paid in capital       = 60,000 + 3,000
                                       = 63,000 shares of $10 each
                                      = $630,000
retained earnings       Balance given $900,000
                                Less Used for 3,000 shares at $14 each = $42,000
                                Balance after stock dividend $858,000
                                 
total stockholders equity
                              Equity shares 63,000 at $10 each          $630,000
                              Paid in capital in excess pf par                 $ 12,000
                              Retained earnings                                   $858,000
                                        Total                                           $1,500,000
outstanding share 60,000 + 3,000                           = 63,000 shares

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