11.7 On October 31, the stockholders\' equity section of Pele Company\'s balance

Question

11.7

On October 31, the stockholders' equity section of Pele Company's balance sheet consists of common stock $490,800 and retained earnings $446,200. Pele is considering the following two courses of action: Declaring a 5% stock dividend on the 81,800 $6 par value shares outstanding Effecting a 2-for-1 stock split that will reduce par value to $3 per share. The current market price is $16 per share. Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares.

Explanation / Answer

Before Action After Stock Dividend After Stock Split Paid-in capital 490800 556240 490800 Retained earning 446200 380760 446200 Total stockholders’ equity 937000 937000 937000 Outstanding shares 81800 85890 163600 Computation After Stock Dividend After Stock Split Outstanding shares 81800*5%+81800 =85890 81800*2=163600 Retained earning 81800*5%*16 =65440 Paid-in capital 81800*5%*16+490800

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