Question

3.  

The owners' equity accounts for Vidi International are shown here:

  

Common stock ($.50 par value)	$	42,500
Capital surplus		355,000
Retained earnings		778,120
Total owners’ equity	$	1,175,620

  

a-1.	If the company declares a five-for-one stock split, how many shares are outstanding now? (Do not round intermediate calculations.)
a-2.	What is the new par value per share? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
b-1.	If the company declares a one-for-four reverse stock split, how many shares are outstanding now? (Do not round intermediate calculations.)
b-2.	What is the new par value per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Solution:
a-1	New shares outstanding	425,000
Working Notes:
	Five-for-one stock split , means 5 new shares for every 1 old share.
	New shares outstanding = existing no of shares x (5/1)
		=85,000 x 5/1
		=425,000
	before split currently no. of shares = 42,500/0.50 = 85,000 shares
	[common stock value / par value]
a-2	New par value $.100 per share
Working Notes:
	Stock split have no impact on other accounts of equity only par value of stock will be changed by the ratio of new shares to old shares
	New par value = old par value x (1/5)
	New par value = $0.50 x (1/5)
	New par value = $0.100
b-1	New shares outstanding 21,250 shares
Working Notes:
	One-for-four reverse stock split means 1 share for every 4 shares
	New shares outstanding = existing no of shares x (1/4)
		=85,000 x 1/4
		=21,250
	before split currently no. of shares = 42,500/0.50 = 85,000 shares
	[common stock value / par value]
b-2	New par value $2.00 per share
Working Notes:
	Reverse Stock split have no impact on other accounts of equity only par value of stock will be changed by the ratio of new shares to old shares
	New par value = old par value x (4/1)
	New par value = $0.50 x (4/1)
	New par value = $2.00
Please feel free to ask if anything about above solution in comment section of the question.