Do I1! R 11-3b has had 4 years of record eamings. Due to this suocess, the marke

Question

Do I1! R 11-3b has had 4 years of record eamings. Due to this suocess, the market price of its 360,000 shares of $2 par value common stock has increased from $12 per to $51. During this p remained the same at $2,160,000. Retained eamings increased from $1,620,000 to $10,800,000. CEO Don Ames is considering either (i) a 15% stock equity, and (c) par value per share. or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained eanings, (b) total stockholders

Explanation / Answer

a) stock dividend -Retained earning:number of shares issued as stock dividend:360000*15%= 54000 shares

= 10,800,000 -[54000*51]

= 10,800,000- 2,754,000

= 8,046,000

Retained earning -stock split = 10,800,000 [no effect on retained earning only book adjustment]

b)

c)stock dividend par value - $ 2 per share

stock split - 2*1/2 = $ 1 per share

Original balance stock dividend stock split paid in capital 2160000 2160000+2754000=4914000 2160000 Retained earning 10,800,000 8046000 10800000 total stockholders equity 12960000 12960000 12960000 number of shares 360000 360000+54000= 414000 360000*2= 720000

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