Question

Exercise 11-5 Stock dividends and splits LO P2

On June 30, 2017, Sharper Corporation’s common stock is priced at $27.00 per share before any stock dividend or split, and the stockholders’ equity section of its balance sheet appears as follows.

Common stock—$6 par value, 60,000 shares authorized, 24,000 shares issued and outstanding	$	144,000
Paid-in capital in excess of par value, common stock		100,000
Retained earnings		244,000
Total stockholders’ equity	$	488,000

1. Assume that the company declares and immediately distributes a 100% stock dividend. This event is recorded by capitalizing retained earnings equal to the stock’s par value. Answer these questions about stockholders’ equity as it exists after issuing the new shares.
a.,b.& c. Complete the below table to calculate the retained earnings balance, total stockholders’ equity and number of outstanding shares.
2. Assume that the company implements a 2-for-1 stock split instead of the stock dividend in part 1. Answer these questions about stockholders’ equity as it exists after issuing the new shares.
a.,b.& c. Complete the below table to calculate the retained earnings balance, total stockholders’ equity and number of outstanding shares.

Answer 1

Solution

Sharper Corporation

1. Assuming the company declares 100% stock dividend –

Table showing retained earnings balance, total stockholders’ equity and number of outstanding shares:

Stock Dividend	Before Stock Dividend	Impact of Stock Dividend	After Stock Dividend
Common Stock	$144,000	$144,000	$288,000
Paid-in capital in excess of par value	$100,000		$100,000
Total Contributed Capital	$244,000	$144,000	$388,000
Retained Earnings	$244,000	($144,000)	$100,000
Total Stockholders' Equity	$488,000	$0	$488,000
Number of Common Shares outstanding	24,000	24,000	48,000

Computations-

Retained Earnings –

Retained earnings before stock dividend = $244,000

Less: Stock dividend (at $6, 24,000 shares)   -$144,000

Retained earnings after stock dividend          $100,000

Total stockholders’ Equity –

Common stock - $6 par value, 60,000 shares authorized.

48,000 shares issued and outstanding                        $288,000

Paid-in capital in excess of par value              $100,000

Retained Earnings                                           $100,000

Total Stockholders’ Equity                             $488,000

Number of outstanding shares –

Outstanding shares before dividend 24,000

Dividend shares                                  24,000

Outstanding shares after dividend     48,000

1. Assuming the company implements a 2 –for -1 stock split:

Table showing retained earnings balance, total stockholders’ equity and number of outstanding shares:

Stock split	Before Stock Split	Impact of Stock Split	After Stock Split
Common Stock	$144,000		$144,000
paid-in capital in excess of par value	$100,000		$100,000
Total contributed capital	$244,000		$244,000
Retained Earnings	$244,000		$244,000
Total Stockholders' Equity	$488,000		$488,000
Number of common shares outstanding	24,000	24,000	48,000

Computations –

Retained Earnings:

Before stock split        $244,000

After stock split          $244,000

Total Stockholders’ Equity:

Common Stock – at $3 par value, 120,000 shares authorized.

48,000 shares issued and outstanding                        $144,000

Paid-in capital in excess of par value              $100,000

Retained earnings                                           $244,000

Total stockholders’ equity                              $488,000

Number of outstanding shares:

Outstanding shares before stock split 24,000

Additional split shares (2-for-1)         24,000

Outstanding shares after stock split    48,000