On October 31, the stockholders’ equity section of Heins Company consists of com

Question

On October 31, the stockholders’ equity section of Heins Company consists of common stock $365,000 and retained earnings $903,000. Heins is considering the following two courses of action: (1) declaring a 6% stock dividend on the 36,500, $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 $16 per share.

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share.

Explanation / Answer

Items Before Dividend & Split After Stock Dividend After Stock Split Common Stock Account                   365,000.00                           401,500.00                        365,000.00 Par Value per Share                             10.00                                     10.00                                     5.00 Shares Outstanding                     36,500.00                             40,150.00                           73,000.00 ($365,000 / $10) (36,500 Shares + 3,650 Shares) 36,500 shares X 2/1 Additional Paid-in Capital                                    -                               21,900.00                                          -   3,650 Shares X $6 Retained Earnings                   903,000.00                           844,600.00                        903,000.00 ($903,000 - $58,400) Total Stockholders' Equity               1,268,000.00                       1,268,000.00                     1,268,000.00 No. of Shares Issued as Stock Dividends = 36,500 Shares X 10% = 3,650 Shares Value of Stock Dividends = 3,650 Shares X $16 = $58,400

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