Squash Delight Inc. has the following balance sheet: The firm’s stock sells for

Question

Squash Delight Inc. has the following balance sheet:

The firm’s stock sells for $12 a share.

a. Show the effect on the capital accounts of a two-for-one stock split. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
  

b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)
  

   
  
c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

Assets   Cash $ 55,000   Accounts receivable 275,000   Fixed assets 870,000      Total assets $ 1,200,000 Liabilities   Accounts payable $ 250,000   Notes payable 58,000   Common stock (100,000 shares @ $2 par) 200,000   Capital in excess of par 100,000   Retained earnings 592,000      Total liabilities & owners' equity $ 1,200,000

Explanation / Answer

a. Show the effect on the capital accounts of a two-for-one stock split

Common stock

$2,00,000

Capital excess of par

$1,00,000

Retained earnings

$5,92,000

Total equity

$8,92,000

*Common stock= Shares outstanding ×Par value per share=

= (2 ×100,000) ×(0.5 ×$2)= 200,000 ×$1= $2,00,000

b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place

Common stock

$2,20,000

Capital excess of par

$2,00,000

Retained earnings

$4,72,000

Total equity

$8,92,000

Number of new shares = Dividend percent ×Number of shares outstanding

= 100,000 x 0.10 = 10,000 shares

Common stock= Number of shares outstanding ×Par value per share

= (100,000 + 10,000) ×$2= $220,000

Capital in excess of par = Original account balance + [Number of new shares ×(Stock price ?Par value)]

= $100,000 + [10,000 ×($12 ?2)]= $2,00,000

Retained earnings = Original account balance ?(Number of new shares ×Stock price)

= $5,92,000 ? (10,000 ×$12)= $4,72,000

c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

Stock dividend Plan

Common stock

$2,00,000

Capital excess of par

$1,00,000

Retained earnings

$5,92,000

Total equity

$8,92,000

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