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 $561,800 and retained earnings $933,100. Omar is considering the following two courses of action: (1) declaring a 10% stock dividend on the 56,180, $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 $15 per share.

Complete the tabular summary of the effects of the alternative actions on the components of stockholders' equity and outstanding shares.

Explanation / Answer

Before Action:
Common stock = $561,800 at $10 par value
No of shares = 56,180

After stock div:
No of shares = 56,180+56180*10% = 61,798
VAlue of dividend = 10% * current market price = $1.5 per share = 1.5*61798 = $92,697.0
This will come from retained earnings
therefore, retained earnings = $933,100 - 92,697 = $840,403.00

Total paid in capital = total stockholders equity - retained earnings = $1,494,900 - $840,403.00 = $654,497.00

Common stock = 61798 * 10 = 617980
In excess = $654,497.00 - 617980 = 617980

After split:
No of outstanding stock = 56180*2 = 112,360 par value is 5
No change in Retained earnings or total shareholders equity

Before Action After Stock Div After Stock Split Common Stock $      561,800.00          617,980.00 $        561,800.00 In excess of Par value 0 $        36,517.00 0 Total paid in capital $      561,800.00 $     654,497.00 $        561,800.00 Retained Earnings $      933,100.00 $     840,403.00 $        933,100.00 Total Stockholders equity $ 1,494,900.00 $ 1,494,900.00 $    1,494,900.00 Outstanding shares                  56,180                  61,798                  112,360

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