Answer :
Sure! Here’s the detailed solution for the problem with a comprehensive step-by-step breakdown of how the stockholders' equity components, outstanding shares, and par value per share are affected by the two alternative actions.
Starting with the given information:
- Common stock = [tex]$320,000 - Retained earnings = $[/tex]894,000
- Shares outstanding = 32,000 shares
- Par value per share = [tex]$10 - Current market price = $[/tex]16 per share
We will consider the two scenarios separately: a 4% stock dividend and a 2-for-1 stock split.
### Before Action:
- Common stock: [tex]$320,000 - In excess of par: $[/tex]0
- Total paid-in capital: [tex]$320,000 - Retained earnings: $[/tex]894,000
- Total stockholders' equity: [tex]$320,000 + $[/tex]894,000 = [tex]$1,214,000 - Outstanding shares: 32,000 shares - Par value per share: $[/tex]10
### After Stock Dividend:
A 4% stock dividend means the company distributes an additional 4% of the existing shares:
- New shares = 4% of 32,000 shares = 1,280 shares
- Increase in common stock = 1,280 shares × [tex]$10 (par value) = $[/tex]12,800
- New common stock = [tex]$320,000 + $[/tex]12,800 = [tex]$332,800 - Decrease in retained earnings = 1,280 shares × $[/tex]16 (market price) = [tex]$20,480 - New retained earnings = $[/tex]894,000 - [tex]$20,480 = $[/tex]873,520
- New total stockholders' equity = [tex]$332,800 + $[/tex]873,520 = [tex]$1,206,320 - New outstanding shares = 32,000 shares + 1,280 shares = 33,280 shares - Par value per share = $[/tex]10 (no change)
### After Stock Split:
A 2-for-1 stock split implies that each existing share will be split into two shares, and the par value per share will be halved:
- New shares outstanding = 32,000 shares × 2 = 64,000 shares
- New par value per share = [tex]$10 / 2 = $[/tex]5
- Common stock and retained earnings remain unchanged.
- Total stockholders' equity remains the same.
Now, let’s present this information in a tabular format:
| | | Before Action | | After Stock Dividend | | After Stock Split |
|-------------------------------|------------|----------------------|---------|---------------------|----------|---------------------|
| Stockholders' equity | | | | | | |
| Paid-in capital | | | | | | |
| Common stock | \[tex]$ | 320,000 | \$[/tex] | 332,800 | \[tex]$ | 320,000 | | In excess of par | | | | | | | | Total paid-in capital | \$[/tex] | 320,000 | \[tex]$ | 332,800 | \$[/tex] | 320,000 |
| Retained earnings | \[tex]$ | 894,000 | \$[/tex] | 873,520 | \[tex]$ | 894,000 | | Total stockholders' equity| \$[/tex] | 1,214,000 | \[tex]$ | 1,206,320 | \$[/tex] | 1,214,000 |
| Outstanding shares | | 32,000 | | 33,280 | | 64,000 |
| Par value per share | \[tex]$ | 10 | \$[/tex] | 10 | \$ | 5 |
This comprehensive tabular summary provides a clear view of the effects of the two potential actions on the components of stockholders' equity, the number of outstanding shares, and the par value per share.
Starting with the given information:
- Common stock = [tex]$320,000 - Retained earnings = $[/tex]894,000
- Shares outstanding = 32,000 shares
- Par value per share = [tex]$10 - Current market price = $[/tex]16 per share
We will consider the two scenarios separately: a 4% stock dividend and a 2-for-1 stock split.
### Before Action:
- Common stock: [tex]$320,000 - In excess of par: $[/tex]0
- Total paid-in capital: [tex]$320,000 - Retained earnings: $[/tex]894,000
- Total stockholders' equity: [tex]$320,000 + $[/tex]894,000 = [tex]$1,214,000 - Outstanding shares: 32,000 shares - Par value per share: $[/tex]10
### After Stock Dividend:
A 4% stock dividend means the company distributes an additional 4% of the existing shares:
- New shares = 4% of 32,000 shares = 1,280 shares
- Increase in common stock = 1,280 shares × [tex]$10 (par value) = $[/tex]12,800
- New common stock = [tex]$320,000 + $[/tex]12,800 = [tex]$332,800 - Decrease in retained earnings = 1,280 shares × $[/tex]16 (market price) = [tex]$20,480 - New retained earnings = $[/tex]894,000 - [tex]$20,480 = $[/tex]873,520
- New total stockholders' equity = [tex]$332,800 + $[/tex]873,520 = [tex]$1,206,320 - New outstanding shares = 32,000 shares + 1,280 shares = 33,280 shares - Par value per share = $[/tex]10 (no change)
### After Stock Split:
A 2-for-1 stock split implies that each existing share will be split into two shares, and the par value per share will be halved:
- New shares outstanding = 32,000 shares × 2 = 64,000 shares
- New par value per share = [tex]$10 / 2 = $[/tex]5
- Common stock and retained earnings remain unchanged.
- Total stockholders' equity remains the same.
Now, let’s present this information in a tabular format:
| | | Before Action | | After Stock Dividend | | After Stock Split |
|-------------------------------|------------|----------------------|---------|---------------------|----------|---------------------|
| Stockholders' equity | | | | | | |
| Paid-in capital | | | | | | |
| Common stock | \[tex]$ | 320,000 | \$[/tex] | 332,800 | \[tex]$ | 320,000 | | In excess of par | | | | | | | | Total paid-in capital | \$[/tex] | 320,000 | \[tex]$ | 332,800 | \$[/tex] | 320,000 |
| Retained earnings | \[tex]$ | 894,000 | \$[/tex] | 873,520 | \[tex]$ | 894,000 | | Total stockholders' equity| \$[/tex] | 1,214,000 | \[tex]$ | 1,206,320 | \$[/tex] | 1,214,000 |
| Outstanding shares | | 32,000 | | 33,280 | | 64,000 |
| Par value per share | \[tex]$ | 10 | \$[/tex] | 10 | \$ | 5 |
This comprehensive tabular summary provides a clear view of the effects of the two potential actions on the components of stockholders' equity, the number of outstanding shares, and the par value per share.