Question

In: Accounting

On October 31, the stockholders’ equity section of Pharoah Company’s balance sheet consists of common stock...

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

Solutions

Expert Solution

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)


Expert Solution

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


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