Squash Delight Inc. has the following balance sheet: Assets Liabilities The firm
ID: 2446287 • Letter: S
Question
Squash Delight Inc. has the following balance sheet:
Assets
Liabilities
The firm's stock sells for $10 a share.
a. Show the effect on the capital account(s) of a two-for-one stock split.
b. Show the effect on the capital accounts of a 10% stock dividend. Part b is seperate from part a. In part b, do not assume the stock split has taken place.
c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?
Cash $100,000 Accounts receivable $300,000 Fixed assets $600,000 Total assets $1,000,000Explanation / Answer
a)
Effect on the capital account(s) of a two-for-one stock split:
Before Split
Common stock (50,000 shares @ $2 par)
$ 100,000
Capital in excess of par
$ 200,000
Retained earnings
$ 500,000
Total
$ 800,000
After Split
Common stock (50000*2 = 100,000 shares @ ($2 /1) = $1 par)
$ 100,000
(No Change in amount only number shares and par value changed)
Capital in excess of par (No Change)
$ 200,000
Retained earnings (No Change)
$ 500,000
Total
$ 800,000
b)
Effect on the capital accounts of a 10% stock dividend:
Before Split
Common stock (50,000 shares @ $2 par)
$ 100,000
Capital in excess of par
$ 200,000
Retained earnings
$ 500,000
Total
$ 800,000
Stock Dividend = 50000 Shares * 10% = 5000 Shares @ $2 Each = $10000
After Stock Dividend
Common stock (50,000 +5000 = 55000 shares @ $2 par)
$ 110,000
Capital in excess of par
$ 200,000
Retained earnings ($500000 -Stock Dividend $10000)
$ 490,000
Total
$ 800,000
c)
In the Stock Dividend plan the retained earnings balance has reduced so this plan shall be more restrictive on future cash dividends.
a)
Effect on the capital account(s) of a two-for-one stock split:
Before Split
Common stock (50,000 shares @ $2 par)
$ 100,000
Capital in excess of par
$ 200,000
Retained earnings
$ 500,000
Total
$ 800,000
After Split
Common stock (50000*2 = 100,000 shares @ ($2 /1) = $1 par)
$ 100,000
(No Change in amount only number shares and par value changed)
Capital in excess of par (No Change)
$ 200,000
Retained earnings (No Change)
$ 500,000
Total
$ 800,000
b)
Effect on the capital accounts of a 10% stock dividend:
Before Split
Common stock (50,000 shares @ $2 par)
$ 100,000
Capital in excess of par
$ 200,000
Retained earnings
$ 500,000
Total
$ 800,000
Stock Dividend = 50000 Shares * 10% = 5000 Shares @ $2 Each = $10000
After Stock Dividend
Common stock (50,000 +5000 = 55000 shares @ $2 par)
$ 110,000
Capital in excess of par
$ 200,000
Retained earnings ($500000 -Stock Dividend $10000)
$ 490,000
Total
$ 800,000
c)
In the Stock Dividend plan the retained earnings balance has reduced so this plan shall be more restrictive on future cash dividends.
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