On October 31, the stockholders’ equity section of Pele Company’s balance sheet

Question

On October 31, the stockholders’ equity section of Pele Company’s balance sheet consists of common stock $486,600 and retained earnings $431,400.

Pele is considering the following two courses of action:

The current market price is $17 per share.

Prepare a tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares.

Pele Company’s
Balance Sheet

(1) Declaring a 6% stock dividend on the 81,100 $6 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $3 per share.

Explanation / Answer

Before Action Dividend After Stock Dividend After Stock Split Stockholders’ equity                             -                     -                                             -                                   -       Paid-in capital                 486,600                   -                                 486,600                      486,600 (162200*3)     Retained earnings                 431,400       (29,196)                               402,204                      402,204                      -          Total stockholders’ equity                 918,000                   -                                 888,804                      888,804                      -   Outstanding shares                   81,100                   -                                    81,100                      162,200 (81100*2)

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