Question

Windsor, Inc. has had 4 years of net income. Due to this success, the market price of its 350,000 shares of $5 par value common stock has increased from $12 per share to $52. During this period, paid-in capital remained the same at $4,410,000. Retained earnings increased from $1,740,000 to $12,700,000. President E. Rife is considering either a 16% stock dividend or a 2-for-1 stock split.
1. Show the before-and-after effects of each option on retained earnings.


a. Retained earnings after stock dividend:________ $

b. Retained earnings after stock split:_______


2. Show the before-and-after effects of each option on total stockholders' equity.


a. Total stockholders' equity after stock dividend:_______ $

b. Total stockholders' equity after stock split:________

Answer 1

Answer:

1.

a.

$9,788,000

b.

$12,700,000

2.

a.

$18,860,000

b.

$18,860,000

Explanation:

Stock dividend is the payment of dividend to stockholder in the form of stock/shares of the company. Stock are issued at the market price and the value of the dividend is transferred from the retained earning to the add-in-capital accounts.

Stock Dividend = 350,000 x 16% x $52 = $2,912,000

Stock split increase the numbers of shares with a specific given ratio but the common equity value remains same that's why the par value of the share decreases with respective ratio.

Stock Split = 350,000 x 2 / 1 x $5/2 = $1,750,000

Total Stockholders equity section includes the paid in capital of common and preferred stocks, additional paid in capital, retained earnings and reserves accounts.

Total Stockholders equity

Common Stock                      $1,750,000

Paid In Capital account         $4,410,000.

Retained Earning                   $12,700,000

Total Stockholder's Equity    $18,860,000

1.

a.

Retained Earning = $12,700,000 - $2,912,000 = $9,788,000

b.

NO change in retained earning after stock split. Stock split only changes the outstanding numbers of shares and par value of the share.

2.

a.

It will remains the same because balances are transferred from retained earnings to the common stock and paid in capital accounts but the total balance remains the same.

b.

As there is no changes to value of any equity account, so total stockholders equity will remain the same.