Exercise 11-15 On October 31, the stockholders’ equity section of Heins Company
ID: 2451707 • Letter: E
Question
Exercise 11-15
On October 31, the stockholders’ equity section of Heins Company consists of common stock $370,000 and retained earnings $904,000. Heins is considering the following two courses of action: (1) declaring a 6% stock dividend on the 37,000, $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 $16 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.
Before After After
Action Stock Stock
Dividend Split
Stockholders’ equity
Paid-in capital
Common stock
In excess of par
Total paid-in capital
Retained earnings
Total stockholders’ equity
Outstanding shares
Par value per share
Explanation / Answer
1. Before action
The company is having the 37000 shares of $10 each outstanding.
Par value of outstanding shares = $10 * 37000 shares = $370,000
Common stock in excess of par = Total common stock - Par value of outstanding shares = $370,000 - $370,000 = 0
2. After stock dividennd
Stock dividend declared = 6% of 37,000 shares = 2,220 shares
Current market price of shares = $16 per share
Value of stock dividend declared = $16 * 2,220 = $35,520
Common stock in excess of par = $35,520 - $22,200 = $13,320
Total number of shares outstanding = 37,000 + 2,220 = 39,220
Total par value of common stock = 39,220 * $10 = $3,92,200
The stock dividend is declared out of the retained earnings.
Retained earnings after stock dividend = $904,000 - $35,520 = $868,480
3. After stock split
In this case, there is no financial impact. Only, the number of shares will get double because one share is split into two shares.
No. of outstanding shares = 37000 * 2 = 74000 shares
Also, there shall be no impact on the retained earnings.
In view of the above, the required tabular summary can be prepared as below:
Before Action
After stock dividend
After stock split
Stockholder's equity
Paid in capital
$370,000.00
$392,200.00
$370,000.00
Common stock in excess of par
$0.00
$13,320.00
$0.00
Total paid in capital
$370,000.00
$405,520.00
$370,000.00
Retained earnings
$904,000.00
$868,480.00
$904,000.00
Total Stockholder's equity
$1,274,000.00
$1,274,000.00
$1,274,000.00
Outstanding shares
37000
39220
74000
Par value per share
$10.00
$10.00
$5.00
Before Action
After stock dividend
After stock split
Stockholder's equity
Paid in capital
$370,000.00
$392,200.00
$370,000.00
Common stock in excess of par
$0.00
$13,320.00
$0.00
Total paid in capital
$370,000.00
$405,520.00
$370,000.00
Retained earnings
$904,000.00
$868,480.00
$904,000.00
Total Stockholder's equity
$1,274,000.00
$1,274,000.00
$1,274,000.00
Outstanding shares
37000
39220
74000
Par value per share
$10.00
$10.00
$5.00
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