Question

Problem 10-06

A firm's balance sheet has the following entries:

Cash	$	10,000,000
Total liabilities		29,000,000
Common stock ($4 par; 1,100,000 shares outstanding)		4,400,000
Additional paid-in capital		1,650,000
Retained earnings		44,000,000

What will be each of these balance sheet entries after:

a) a two-for-one stock split? Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.

Cash		$ ________
Total liabilities		$ ________
Common stock ($________   par; ________ shares outstanding)		$ ________
Additional paid-in capital		$ ________
Retained earnings		$  ________

b) a $1.75 per share cash dividend? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.

Cash		$  ________
Total liabilities		$ ________
Common stock ($________   par; ________ shares outstanding)		$ ________
Additional paid-in capital		$ ________
Retained earnings		$ ________

c) a 10 percent stock dividend (current price of the stock is $13 per share)? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.

Cash		$________
Total liabilities		$________
Common stock ($________   par; ________ shares outstanding)		$________
Additional paid-in capital		$________
Retained earnings		$________

Answer 1

a) In a 2-for-1 stock split number of shares double and face value of share is reduced by 1/2

The balance sheet after stock split would be:

Cash	10000000
Total Liabilities	29000000
Common Stock ($2 par;2200000 shares outstanding)	4400000
Additional paid in capital	1650000
Retained Earnings	44000000

b) Cash dividend reduces cash and retained earnings:

Amount of cash dividend = $1.75 * 1100000 = $1925000

Cash	8075000
Total Liabilities	29000000
Common Stock ($4 par;1100000 shares outstanding)	4400000
Additional paid in capital	1650000
Retained Earnings	42075000

c) Stock dividend reduces retained earnings by the amount of dividend. The par value of stock increases the common stock and the premium increases the additional paid in capital.

Stock dividend = 10% * $13 * $1100000 = $1430000

Par value of stock issued as dividend = 10% * 1100000 * $4 = $440000

Premium = $1430000 - $440000 = $990000

The balance sheet would look like:

Cash	10000000
Total Liabilities	29000000
Common Stock ($4 par;1100000 shares outstanding)	4840000
Additional paid in capital	2640000
Retained Earnings	42570000