Squash Delight Inc. has the following balance sheet: Assets Cash $ 55,000 Accounts receivable 275,000 Fixed...

Squash Delight Inc. has the following balance sheet:


Assets
Cash	$	55,000
Accounts receivable		275,000
Fixed assets		870,000

Total assets	$	1,200,000

Liabilities
Accounts payable	$	250,000
Notes payable		58,000
Common stock (100,000 shares @ $2 par)		200,000
Capital in excess of par		100,000
Retained earnings		592,000

Total liabilities & owners' equity	$	1,200,000

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. Show the effect on the capital accounts of a two-for-one stock split

Common stock	$2,00,000
Capital excess of par	$1,00,000
Retained earnings	$5,92,000
Total equity	$8,92,000

*Common stock= Shares outstanding ×Par value per share=

= (2 ×100,000) ×(0.5 ×$2)= 200,000 ×$1= $2,00,000

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

Common stock	$2,20,000
Capital excess of par	$2,00,000
Retained earnings	$4,72,000
Total equity	$8,92,000

Number of new shares = Dividend percent ×Number of shares outstanding

= 100,000 x 0.10 = 10,000 shares

Common stock= Number of shares outstanding ×Par value per share

= (100,000 + 10,000) ×$2= $220,000

Capital in excess of par = Original account balance + [Number of new shares ×(Stock price ?Par value)]

= $100,000 + [10,000 ×($12 ?2)]= $2,00,000

Retained earnings = Original account balance ?(Number of new shares ×Stock price)

= $5,92,000 ? (10,000 ×$12)= $4,72,000

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

Stock dividend Plan

ekkarill92 answered 1 year ago

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