Question

Blossom Company has had 4 years of record earnings. Due to this success, the market price of its 370,000 shares of $2 par value common stock has increased from $15 per share to $51. During this period, paid-in capital remained the same at $2,220,000. Retained earnings increased from $1,665,000 to $11,100,000. 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.

Answer 1

Answer:

(1) stock dividends

retained earnings will decrease by  2.830.500‬

total stockholders equity will remain unchanged. the rdecrease in RE is countered with the increase in common stock and additinal paid-in capital

the price will be kept at $51 as the company reocgnize this as the stock value when issuing the shares by using additional paid-in account for the difference between par value and market value

(2) the stock split

It generates no effect on the accounting as just additional shares at issued but the total capitalization and equity values are the same.

The price per share will be half as there is now double amount of shares:

$1 par value

and $25.50 market value

Explanation:

stock dividends

amount of shares issued:

370,000 shares x 15% =  55,500 shares

Retained Earnings decrease: 55,500 x 51 = 2.830.500‬

55,500 x $ 2 par value = 111,000 common stock

55,500 x $ (51-2) =         499,500 additional paid-in