In: Accounting
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 |
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---|---|---|---|---|---|---|
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 |
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) |
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 |