Question

On October 31, the stockholders’ equity section of Heins Company consists of common stock $370,000 and retained earnings $904,000. Heins is considering the following two courses of action: (1) declaring a 6% stock dividend on the 37,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $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.
Before After After
Action Stock Stock
Dividend Split
Stockholders’ equity
Paid-in capital
Common stock
In excess of par
Total paid-in capital
Retained earnings
Total stockholders’ equity
Outstanding shares
Par value per share

Answer 1

Answer:

1. Before action

Par value of outstanding shares = 37,000 shares*$10 = $370,000

Common stock in excess of par = Total common stock - Par value of outstanding shares = $370,000 - $370,000 = $0

2. After stock dividend

Stock dividend declared = 6% of 37,000 shares = 2,220 sharea

Market price of shares = $16 per share

Stock dividend declared = $16*2,220 shares= $35,520

Common stock in excess of par = $35,520 - $22,200 = $13,320

Total number of shares outstanding = 37,000 + 2,220 = 39,220

Total par value of common stock = 39,220 * $10 = $392,200

t is out of the retained earnings that the stock dividend is declared from. So, retained earnings after stock dividend = $904,000 - $35,520 = $868,480

3. After stock split

Here , there is no financial impact. The no of shares will get X2 because one share is split into two shares.

Number of outstanding shares = 37000 shares*2 = 74000 shares. Also, no impact on the retained earnings

                                    Before Action  After-stock dividend  After stock split

Stockholder's equity

Paid in capital              $370,000.00      $392,200.00           $370,000

Common stock in        $0.00                   $13,320.00               $0

excess of par

Total paid in capital     $370,000.00      $405,520.00            $370,000

Retained earnings       $904,000.00      $868,480.00            $904,000

Total Stockholder's     $1,274,000.00     $1,274,000.00         $1,274,000

equity

Outstanding shares      37000                     39220                     74000

Par value per share      $10.00                    $10.00                      $5.00