The stockholders’ equity section of the balance sheet for Gator Company at Decem

Question

The stockholders’ equity section of the balance sheet for Gator Company at December 31, 2014, is as follows:

If Gator declared a 2-for-1 stock split on the common stock, how many shares would be outstanding after the split? What amount would be transferred from the Retained Earnings account because of the stock split? Theoretically, what would be the market price of the common stock immediately after the stock split?

The stockholders’ equity section of the balance sheet for Gator Company at December 31, 2014, is as follows:

     Stockholders’ Equity   Paid-in capital      Preferred stock, ? par value, 4% cumulative,        270,000 shares authorized, 57,000 shares issued
       and outstanding $ 570,000      Common stock, $25 stated value, 320,000 shares
       authorized, 57,000 shares issued and ? outstanding 1,425,000      Paid-in capital in excess of par—Preferred 47,000      Paid-in capital in excess of stated value—Common 114,000   Total paid-in capital 2,156,000   Retained earnings 420,000   Treasury stock, 6,000 shares (42,000 )      Total stockholders’ equity $ 2,534,000

If Gator declared a 2-for-1 stock split on the common stock, how many shares would be outstanding after the split? What amount would be transferred from the Retained Earnings account because of the stock split? Theoretically, what would be the market price of the common stock immediately after the stock split?

Shares outstanding after the split Amount transferred form retained earnings Market price of common stock after the split

Explanation / Answer

1) number of shares after the split = 320000 x 2 = 640000

2) No amount will be transferred from retained earnings as stock split is not a stock dividend. A stock split will not change the general ledger account balances and therefore will not change the dollar amounts reported in the stockholders' equity section of the balance sheet.

3) Stock split does not affect the total asset, liabilities and stockholders' equity of the corporation. As these remain same as before after the stock split, but the number of stocks gets doubled with the par vale of each outstanding shares equal to half of its previous par value, the stock split should theoretically bring down the market price of each share to the half of it previous price (that is price before the stock split).

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