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Squash Delight Inc. has the following balance sheet: Assets Cash $ 30,000 Accounts receivable 317,000 Fixed...

Squash Delight Inc. has the following balance sheet:

Assets
Cash $ 30,000
Accounts receivable 317,000
Fixed assets 862,000
Total assets $ 1,209,000
Liabilities
Accounts payable $ 262,000
Notes payable 56,000
Common stock (130,000 shares @ $2 par) 260,000
Capital in excess of par 100,000
Retained earnings 531,000
Total liabilities & owners' equity $ 1,209,000

The firm’s stock sells for $12 a share.

a. Show the effect on the capital accounts of a two-for-one stock split. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b, do not assume the stock split has taken place. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

  • Stock split

  • Stock dividend

Solutions

Expert Solution

a. A stock split does not affect the monetary values in the capital accounts or the balance sheet. After the stock split, the par value of the stock will be reduced to $1 and number of shares will be increased to 260,000

b. Stock dividends will be paid out from Retained earnings

c) In case of stock splits, the balance of retained earnings remains the same at $531,000. But in case of stock dividends, the blance of retained earnings is reduced to $375,000.

So Stock dividends are more restrictive on future cash dividends compared to stock splits

jeff jeffy answered 1 year ago
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