C AT OR PRINTER VERS ON BACK N SSpears Company has had 4 years of record earning

Question

C AT OR PRINTER VERS ON BACK N SSpears Company has had 4 years of record earnings. Due to this success, the market price of its 400,000 shares of $2 par value common stock has increased from $6 per share to $50. During this period, paid-in capital remained the same at $2,400,000. Retained earnings increased from $1,800,000 to $12,000,000. CEO Don Ames is considering either (1) a 15% stock dividend or 2 a 2-for-1 stock split He asks you to sho the before-and-after effects of each option on (a) retained earnings, (b) total stockholders' equity, and (c) par value per share. 1. Stock dividend- retained earnings 900000 2. 2-for-1 stock split retained earnings 1200000 Spears Company Original Balance After Dividend After Split Paid-in capital 20000D 360000 400000 Retained earnings 12000000 1200000 Total stockholder's equity 400000 260000 1600000 Shares outstanding 400000 800000 1. Stock dividend - par value per share 2. 2-for-1 stock split par value per share Click if you would like to Show Work for this question: Open Show Work s

Explanation / Answer

Stock dividend 400,000shares*15% 60000 retained earnings (60,000*50)= 3000000 a) Stock dividend 3000000 2-for 1-stock split-retained earnings 0 b) original After After balance dividend split paid in capital 2,400,000 5,400,000 2,400,000 retained earnings 12,000,000 9,000,000 12,000,000 total sotckholders Equity 14,400,000 14,400,000 14,400,000 shares outstanding 400,000 460,000 800,000

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