Question

On October 31, the stockholders� equity section of Pele Company�s balance sheet consists of common stock $648,000 and retained earnings $400,000.

Pele is considering the following two courses of action:

(1) Declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding
(2) Effecting a 2-for-1 stock split that will reduce par value to $4 per share.

The current market price is $17 per share.

Prepare a tabular summary of the effects of the alternative actions on the company�s stockholders� equity and outstanding shares.

Answer 1

(1) common stock increase by 32,400

additional paid-in increase by 36,450

retained earnings decreases by 68,850

(2) It will have no effect on the accounting as the stock split will not alter the total capitalization outstanding, only the amount of outstanding shares of common stock will increase.

Step-by-step explanation:

(1) outstanding common stock:

$648,000 / $8 per share = 81,000

new shares: 81,000 x 5% = 4,050 shares

face value: 4,050 x $8 = 32,400

total value: 4,050 x $17 = 68,850

additional paid in: 36,450