Exercise 11-7 Your answer is partially correct. Try again. On October 31, the st

Question

Exercise 11-7 Your answer is partially correct. Try again. On October 31, the stockholders' equity section of Sheridan Company's balance sheet consists of common stock $582,000 and retained earnings $407,000. Sheridan is considering the following two courses of action: (1) Declaring a 6% stock dividend on the 97,000 $6 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $3 per share. The current market price is $18 per share Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Sheridan Company's Balance Sheet Before Action After Stock Dividend After Stock Split Stockholders' equity Paid-in capital 582000 582000 582000 Retained earnings 407000 407000 407000 Total stockholders' equity Outstanding shares 97000 97000 194000

Explanation / Answer

the following is the required tabular summary:

note:

consider stock dividend situaltion:

6% is the stock dividend =>97,000* 6% =>5,820 shares are given additionally.

total outstanding shares will be = 97,000 + 5,820 = 102,820

total number of outstanding shares will be 5,820 * $18 =>$104,760.

paid in capital = 582000 + 104760 =>686760

retained earnings = 407000-104760 =>302240.

now<

consider stock split.

since it is 2 for 1 stock split,

the new number of shares = 97,000 * 2 =>194,000 shares.

there will be no change in paid in capital as 194,000 * $3 =>$582,000.

retained earnings is not affected by stock split.

Before action after stock dividend after stock split Stock holder's equity Paid in capital $582000 $686760 $582000 retained earnings 407000 302240 407000 Total stock holder's equity 989,000 989,000 989,000 outstanding shares 97,000 102,820 194,000

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