Question

Sheridan Company has had 4 years of record earnings. Due to this success, the market price of its 450,000 shares of $2 par value common stock has increased from $12 per share to $51. During this period, paid-in capital remained the same at $2,700,000. Retained earnings increased from $2,025,000 to $13,500,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.(a)1. Stock dividend - retained earnings $2. 2-for-1 stock split - retained earnings $(b)

Sheridan Company Original Balance After DividendAfter SplitPaid-in capital $$$ Retained earnings Total stockholder’s equity $ $ $ Shares outstanding (c)1. Stock dividend - par value per share $2. 2-for-1 stock split - par value per share

Answer 1

15% stock dividend

before after

retained earnings $13,500,000 $10,057,500

common stock $900,000 $1,035,000

APIC $2,700,000 $6,007,500

stockholders' equity $17,100,000 $17,100,000

par value $2 per stock $2 per stock

2 for 1 stock split

before after

retained earnings $13,500,000 $13,500,000

common stock $900,000 $900,000

APIC $2,700,000 $2,700,000

stockholders' equity $17,100,000 $17,100,000

par value $2 per stock $1 per stock

Step-by-step explanation:

market price increased from $12 to $51 (450,000 stocks outstanding x $2 par value)

additional paid in capital $2,700,000

retained earnings increased from $2,025,000 to $13,500,000

15% stock dividend, small stock dividend, journal entry:

Retained earnings 3,442,500 (= 450,000 stocks x 15% x $51)

Cr Common stock 135,000 (= 67,500 stocks x $2)

Cr Additional paid in capital 3,307,500

2 for 1 stock split does not require a journal entry since no values are changed in the balance sheet, only the number of stocks change and teh par value decreases by 50%