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 $322,000 and retained earnings $395,600.

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 80,500 $4 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $2 per share.

Explanation / Answer

Answer:

Pele Company’s Balance Sheet Before Action After Stock Dividend After Stock Split Stockholders’ equity    Paid-in capital 322000 406525 322000    Retained earnings 395600 311075 395600       Total stockholders’ equity 717600 717600 717600 Outstanding shares 80500 86135 166635

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