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Exercise 11-7 On October 31, the stockholders’ equity section of Pele Company’s

ID: 2472075 • Letter: E

Question

Exercise 11-7

On October 31, the stockholders’ equity section of Pele Company’s balance sheet consists of common stock $581,400 and retained earnings $445,500.

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 6% stock dividend on the 96,900 $6 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $3 per share.

Explanation / Answer

Tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares:

Pele Company’s

Balance Sheet

Before Action

After Stock Dividend

After Stock Split

Stockholders’ equity

   Paid-in capital

$              581,400

668610

$              581,400

581400+ (96900 Shares*6%)*$15

(193800*$3)

   Retained earnings

$              445,500

358290

$              445,500

445500- (96900 Shares*6%)*$15

(No Change)

      Total stockholders’ equity

$           1,026,900

$                               1,026,900

$           1,026,900

Outstanding shares

96,900

102,714

193,800

(96900+(96900*6%)

(96900*2/1)

Tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares:

Pele Company’s

Balance Sheet

Before Action

After Stock Dividend

After Stock Split

Stockholders’ equity

   Paid-in capital

$              581,400

668610

$              581,400

581400+ (96900 Shares*6%)*$15

(193800*$3)

   Retained earnings

$              445,500

358290

$              445,500

445500- (96900 Shares*6%)*$15

(No Change)

      Total stockholders’ equity

$           1,026,900

$                               1,026,900

$           1,026,900

Outstanding shares

96,900

102,714

193,800

(96900+(96900*6%)

(96900*2/1)