Question

Crane Company has had 4 years of record earnings. Due to this success, the market price of its 385,000 shares of $2 par value common stock has increased from $13 per share to $53. During this period, paid-in capital remained the same at $2,310,000. Retained earnings increased from $1,732,500 to $11,550,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.

(a)

1.		Stock dividend - retained earnings		$enter a dollar amount
2.		2-for-1 stock split - retained earnings		$enter a dollar amount

(b)

Crane Company
		Original Balance		After Dividend		After Split
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 stockholder’s 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
Shares outstanding		enter a number of shares		enter a number of shares		enter a number of shares

(c)

1.		Stock dividend - par value per share		$enter a dollar amount
2.		2-for-1 stock split - par value per share		$enter a dollar amount

Answer 1

(a)

1.		Stock dividend - retained earnings		$8489250
2.		2-for-1 stock split - retained earnings		$11550000

1) Stock dividend shares= 385000*15%= 57750

As the stock dividend is 15% that means the value of the stock dividend is calculated on the market price.

Stock dividend= 57750*$53= $3060750

As the stock dividend reduces the retained earnings.So,

Retained earnings after stock dividend= $11550000-3060750= $8489250

2) When the company declared the stock split there will no change in retained earnings, the par value of the shares decreases and the number of shares outstanding increases. So, we can say that when the company has declared stock split there is no change in retained earnings.

(b)

Crane Company
		Original Balance		After Dividend		After Split
Paid-in capital		$2310000		$5370750		$2310000
Retained earnings		11550000		8489250		11550000
Total stockholder’s equity		$13860000		$13860000		$13860000
Shares outstanding		385000		442750		770000

After dividend

Stock dividend shares= 385000*15%= 57750

As the stock dividend is 15% that means the value of the stock dividend is calculated on the market price.

Stock dividend= 57750*$53= $3060750

New paid-in capital= $2310000+3060750= $5370750

As the stock dividend reduces the retained earnings.So,

Retained earnings after stock dividend= $11550000-3060750= $8489250

Shares outstanding= 385000+57750= 442750

After split

As the company is declaring 2-for-1 stock split the shares of the company will increases.

Shares outstanding= 385000*2= 770000
(c)

1.		Stock dividend - par value per share		$2
2.		2-for-1 stock split - par value per share		$1

When the company declared stock dividend, there is no change in the par value per share but when the company declares 2-for-1 stock split the par value per shares of the company will decreases

Par value at stock split= $2/2= $1

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