On OCT 31, the stockholders' equity section of MCompany's balance sheet consists ofcommon stock $648,000 and retained earnings $400,000. MCompany is considering thefollowing two courses of action:(1) declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding or(2) effecting a 2-for-1 stock split that will reduce par value to $4 per share.The current market price is $17 per share.InstructionsPrepare a tabular summary of the effects of the alternative actions on the company'sstockholders' equity and outstanding shares. Use these column headings: Before Action,After Stock Dividend, and After Stock Split.Before ActionStockholders' equity:Paid-in CapitalRetained EarningsTotal Stockholders Equity $ 1,048,000$ 648,000400,00081,000After StockDividendAfter StockSplitOutstanding Shares(1) By choosing stock dividend, you will be distributing 5% additional shares over the 81,000shares "before the action". The "paid-in capital" of the stock dividend is calculated as the numberof new shares ... times par OR times market? Remember that issuing new shares reducesretained earnings by number of new shares times par OR market?(2) By choosing the stock-split you "call in" the existing outstanding shares of stock from yourinvestors and issue 2x that number of "new" shares back to the same investors. They get 2 "new"shares for every one that was "called in". BUT, does the paid-in capital calculation for the newshares use the $8 par ... OR double $8 par OR ½ the $8 par?

The stockholders' equity section records the transactions that relates to the shareholders of the…

Answered: On OCT 31, the stockholders' equity…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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