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On October 31, the stockholders' equity section of Ivanhoe Company consists of common stock [tex]$320,000 and retained earnings $[/tex]894,000. Ivanhoe is considering the following two courses of action:
1. Declaring a [tex]$4\%$[/tex] stock dividend on the 32,000, [tex]$10 par value shares outstanding, or
2. Effecting a 2-for-1 stock split that will reduce par value to $[/tex]5 per share.

The current market price is [tex]$16 per share.

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders' equity, outstanding shares, and par value per share.

\[
\begin{tabular}{|c|c|c|c|c|c|c|}
\hline
& & \textbf{Before Action} & & \textbf{After Stock Dividend} & & \textbf{After Stock Split} \\
\hline
\multicolumn{7}{|c|}{\textbf{Stockholders' Equity}} \\
\hline
\multicolumn{7}{|c|}{\textbf{Paid-in Capital}} \\
\hline
\textbf{Common Stock} & \$[/tex] & & \[tex]$ & & \$[/tex] & \\
\hline
\multicolumn{7}{|c|}{\textbf{In Excess of Par}} \\
\hline
\multicolumn{7}{|c|}{\textbf{Total Paid-in Capital}} \\
\hline
\multicolumn{7}{|c|}{\textbf{Retained Earnings}} \\
\hline
\textbf{Total Stockholders' Equity} & \[tex]$ & & \$[/tex] & & \[tex]$ & \\
\hline
\multicolumn{7}{|c|}{\textbf{Outstanding Shares}} \\
\hline
\textbf{Par Value per Share} & \$[/tex] & & \[tex]$ & & \$[/tex] & \\
\hline
\end{tabular}
\]



Answer :

GinnyAnswer
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.

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