Question

In: Accounting

Squash Delight Inc. has the following balance sheet: Assets Cash $ 60,000 ' Accounts receivable 287,000...

Squash Delight Inc. has the following balance sheet:

Assets

Cash $ 60,000 '

Accounts receivable 287,000

Fixed assets 775,000

Total assets $ 1,122,000

Liabilities

Accounts payable $ 275,000

Notes payable 53,000

Common stock (120,000 shares @ $2 par) 240,000

Capital in excess of par 100,000

Retained earnings 454,000

Total liabilities & owners' equity $ 1,122,000 The firm’s stock sells for $10 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.)

Common Stock _______

Capital Excess of par ________

Retained Earnings ________

Total Equity _________

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 _____________

Capital Excess of par ___________

Retained Earnings _________

Total Equity ____________

Solutions

Expert Solution

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

Common Stock

$240000

Capital excess of par

100000

Retained earnings

454000

Total Equity

$794000

Common stock = Shares outstanding x par value per share

= (2 x 120000) x .5 x $2

= 240000 x $1 = $240000

A stock split affects the number of shares outstanding and the par value of per share but has no effect on any of the equity account balances.

b. Show the effect on the capital accounts of a 10 percent stock dividend.

Common Stock

$264000

Capital excess of par

196000

Retained earnings

334000

Total Equity

$794000

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

= .10 x 120000 = 12000

Common Stock = Numbers of shares outstanding x par value per share

= (120000 + 12000) x $2 = $264000

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

= $100000 + 12000 x (10 - 2) = $196000

Retained Earnings = Original account balance – (Number of new shares x Stock price)

= 454000 – (12000 x $10) = $334000

ekkarill92 answered 1 year ago
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