On October 31, the stockholders’ equity section of Heins Company consists of com

Question

On October 31, the stockholders’ equity section of Heins Company consists of common stock $330,000 and retained earnings $896,000. Heins is considering the following two courses of action: (1) declaring a 7% stock dividend on the 33,000, $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.

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share.

Before Action

After Stock Dividend

After Stock Split

On October 31, the stockholders' equity section of Heins Company consists of common stock $330,000 and retained earnings $896,000. Heins is considering the following two courses of action: (1) declaring a 7% stock dividend on the 33,000, $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. Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and par value per share. Before Action After Stock Dividend After Stock Split

Explanation / Answer

1) Declaring a 7% stock dividend on the 33,000, $10 par value shares outstanding

No. of New Shares to be issued = 33000*7% = 2310 shares (which are going to be valued at market price)

The entry will be

Retained Earnings DR 32340

Common Stock 23100

In Excess of Par Value 9240

2) effecting a 2-for-1 stock split that will reduce par value to $5 per share.

The no. of shares will now become = 33000*2 = 66000shares

STOCKHOLDER'S EQUITY BEFORE ACTION AFTER STOCK DIVIDEND AFTER STOCK SPLIT Paid-In Capital $ Common Stock 330000 353100 330000 In Excess of Par value 9240 Total Paid in Capital 330000 362340 330000 Retained Earnings 896000 863660 896000 Total Stock Holder's Equity 1226000 1226000 1226000 Outstanding shares 33000 35310 66000

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