Question

Novak Corp. has had 4 years of net income. Due to this success, the market price of its 300,000 shares of $5 par value common stock has increased from $11 per share to $54. During this period, paid-in capital remained the same at $4,290,000. Retained earnings increased from $1,790,000 to $12,900,000. President E. Rife is considering either a 17% 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.
Retained earnings after stock dividend
Retained earnings after stock split

Answer 1

Answer:

Retained earnings after stock dividend  = $10,146,000

Retained earnings after stock split = $12,900,000

Explanation:

1. Retained earnings after stock dividend amount is: 300,000*17%*54 = $2,754,000. The new balance of retained earnings is = $12,900,000 - $2,754,000 = $10,146,000

2. The retained earning after stock-split will not change and it is same as $12,900,000