Question

On October 31, the stockholders’ equity section of Pharoah Company’s balance sheet consists of common stock $ 680,000 and retained earnings $395,000. Pharoah is considering the following two courses of action:

(1)		Declaring a  5% stock dividend on the  85,000 $ 8 par value shares outstanding
(2)		Effecting a 2-for-1 stock split that will reduce par value to $ 4 per share.

The current market price is $ 13 per share.

Prepare a tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares.

Pharoah Company’s Balance Sheet
		Before Action		After Stock Dividend		After Stock Split
Stockholders’ equity
Paid-in capital		$ enter a dollar amount		$ enter a dollar amount		$ enter a dollar amount
Retained earnings		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total stockholders’ equity		$ enter a total of the two previous amounts		$ enter a total of the two previous amounts		$ enter a total of the two previous amounts
Outstanding shares		enter a number of shares		enter a number of shares		enter a number of shares

Answer 1

Situation	Change in Company's Stockholder's Equity	Change in No of Shares Outstanding
Declaring a  5% stock dividend on the  85,000 $ 8 par value shares outstanding	Total Dividend = 85000*8*5% = $34000. This would reduce the Retained Earnings by $34000. Hence Retained Earnings after Dividend = $395000-$34000 = $361000. SHAREHOLDER'S EQUITY Common Stock - $680000 Retained Earnings - $361000 Market price may rise by $0.4.	There will be no change in Outstanding Stocks.
Effecting a 2-for-1 stock split that will reduce par value to $ 4 per share.	There will be no change in Shareholder's Equity. Only additional shares will be issued and par value of Shares would change. SHAREHOLDER'S EQUITY Common Stock - $680000 Retained Earnings - $395000 Market Price may become half i.e., $6.5.	Additional 85000 shares will be issued to existing Stockholder's in the proportion of their existing Share Holding. No of Stock after split = 170000(Par Value $4)

Answer 2

	Before Action	After Stock Dividend	After Stock Split
Stockholders’ equity
Paid-in capital	$680,000	$735,250	$680,000
Retained earnings	$395,000	$339,750	$395,000
Total stockholders’ equity	$1,075,000	$1,075,000	$1,075,000
Outstanding shares	85,000	89,250	170,000

--Working

	Before Action	After Stock Dividend	After Stock Split
Stockholders’ equity
Paid-in capital	680000	=680000+(85000*5%*13)	=170000*4
Retained earnings	395000	=395000-(85000*5%*13)	395000
Total stockholders’ equity	=680000+395000	=735250+339750	=680000+395000
Outstanding shares	=680000/8	=85000+(85000*5%)	=85000*2/1