The December 31, 2014 stockholders\' equity section of Cedar, Inc. is as follows

Question

The December 31, 2014 stockholders' equity section of Cedar, Inc. is as follows: (10 Points) The market price of the common stock on December 31, 2014, was $10 per share.

Answer the following independent questions: 1. What will the balance in the retained earnings account be immediately after the declaration of a 2-for-1 stock split? 2. If a cash dividend of $1 per share was declared to both common and preferred shareholders, what will the balance be in retained earnings immediately after the declaration? 3. What balance will be in the retained earnings account immediately after the declaration of a 20% common stock dividend on December 31, 2010?

Explanation / Answer

Firstly, Given Information is incomplete with respect to retained earnings balance, number of Common stock and preference shares issued by the company.

However, based on current information, answers are as follows:

1. In the first question, declaration of 2-for-1 stock split- It means existing each share is divided into two shares.

   It doesn't have any impact on Retained Earnings. So, balance of Retained earnings will not change.

2. In the second case, To the extent of total amount of cash dividend declared on both common and preferred

   shareholders, The Retained earnings balance gets reduce to that extent.

   So, balance in Retained earnings immediately after declaration gets reduced.

3. In the third case, To the extent of 20% common stock dividend on face value of common stock, but not on

    Market price, The Retained earnings balance gets reduced.

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