Question

On October 31, the stockholders' equity section of Pharoah Company consists of common stock $330,000 and retained earnings $896,000. Pharoah is considering the following two courses of action: (1) declaring a 7% stock dividend on the 33,000, $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 $14 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.

Answer 1

Answer:

Before action $33,000

After stock dividend $35,310

After stock split $146,200

Explanation:

BEFORE ACTION

Stockholder Equity:

Paid In Capital

Common Stock $330,000

In Exess Par Value $0

Total Paid In Capital $330,000

Retained Earnings $896,000

Total StockholderEquity $1,226,000

Oustanding Shares $33,000

AFTER STOCK DIVIDEND

Stockholder Equity:

Paid In Capital

Common Stock $353,100

(7%×330,000+330,000)

In Exess Par Value $6,600

(33,000/5)

Total Paid In Capital $359,700

Retained Earnings $866,300

Total StockholderEquity $1,226,000

Oustanding Shares $35,310

AFTER STOCK SPLITS

Stockholder Equity:

Paid In Capital

Common Stock $330,000

In Exess Par Value $0

Total Paid In Capital $330,000

Retained Earnings $896,000

Total StockholderEquity $1,226,000

Oustanding Shares $146,200