Sing CD Company has had five years of record earnings. Due to this success, the
ID: 2337813 • Letter: S
Question
Sing CD Company has had five years of record earnings. Due to this success, the market price of its 500,000 shares of $2 par value common stock has tripled from $15 per share to $45. During this period, paid-in capital remained the same at $2,00,000. Retained earnings increased from $1,500,000 to $10,000,000. President Joan Elbert is considering either a 10% stock dividend or a 2-for-1 stock split. She asks you to show the before-and-after effects of each option on retained earnings, total stockholders' equity, and par value per share.Explanation / Answer
Balance before stock dividend / 2 for 1 stock split
now,
1st option stock dividend
when 10% stock dividend is declared.
10% of 500,000 shares =>50,000 shares are issued to share holders @$45 i.e market price..
so, paid in capital will increase by 50,000 shares * $45 =>$2,250,000
retained earnings will decrease by (50,000 shares *$45)=>$2,250,000
total stock holders equity will remain the same , since retained earnings is reduced and paid in capital increased by same amount of $2,250,000.
par value is not affected due to stock dividend.
new balances after stock dividend:
2nd option:
2 for 1 stock split.
stock split will result in increase in number of shares outstanding, and reducing par value per share.
Paid in capital amount and also the balance of retained earnings are not affected.
new number shares.
=> old number of shares * new shares given / old shares
=>500,000 * 2 / 1
=>1,000,000 shares.
new par value per share = old par value * (old shares taken / new shares given)
=.$2 * (1/2)
=>$1.
so, the balances after 2 for 1 stock split:
retained earning $10,000,000 total stock holders equity (paid in capital +retained earnings) 12,000,000 par value per share $2 per share