Question

Blue Spruce Corp. has had 4 years of net income. Due to this success, the market price of its 460,000 shares of $4 par value common stock has increased from $10 per share to $50. During this period, paid-in capital remained the same at $4,230,000. Retained earnings increased from $1,770,000 to $11,200,000. President E. Rife is considering either a 13% stock dividend or a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on retained earnings.

Required:
1. Stock dividend - retained earnings $ ________
2. 2-for-1 stock split - retained earnings $ ________

Answer 1

Answer and Explanation:

The computation of Stock dividend - retained earnings is shown below:-

Shares Issued as Stock Dividend = Market price shares × Stock dividend percentage

= 460,000 × 13%

= 59,800

1. Stock Dividend = Shares Issued as Stock Dividend × Increased share

= 59,800 × $50

= $2,990,000

Based on the above calculation, the amount after stock dividend is

= $11,200,000 - $2,990,000

= $8,210,000

2. And, After the stock splits the retained earning balance remain the same as it was before the split - $11,200,000

Total Stockholders' Equity does not change - After Stock Split