On October 31, the stockholders’ equity section of Pele Company’s balance sheet

Question

On October 31, the stockholders’ equity section of Pele Company’s balance sheet consists of common stock $371,600 and retained earnings $449,600.

Pele is considering the following two courses of action:

The current market price is $15 per share.

Prepare a tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares.

Pele Company’s
Balance Sheet

(1) Declaring a 7% stock dividend on the 92,900 $4 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $2 per share.

Explanation / Answer

Number of shares issued as stock dividend = 92900 *.07 = 6503 shares

Shares outstanding in case of stock dividend = 92900 +6503 = 99403 shares

Retained earning = 449600- (6503* 15) = 352055

Paid in capital = 371600 + (6503*15)= 469145

Before action After stock dividend After stock split Stockholders’ equity   Paid-in capital 371600 469145 371600   Retained earnings 449600 352055 449600 Total stockholders’ equity 821200 821200 821200 Outstanding shares 92900 99403 92900*2= 185800

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