Squash Delight Inc. has the following balance sheet: Assets Cash $ 60,000 \' Acc
ID: 2542240 • Letter: S
Question
Squash Delight Inc. has the following balance sheet:
Assets
Cash $ 60,000 '
Accounts receivable 287,000
Fixed assets 775,000
Total assets $ 1,122,000
Liabilities
Accounts payable $ 275,000
Notes payable 53,000
Common stock (120,000 shares @ $2 par) 240,000
Capital in excess of par 100,000
Retained earnings 454,000
Total liabilities & owners' equity $ 1,122,000 The firm’s stock sells for $10 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.)
Common Stock _______
Capital Excess of par ________
Retained Earnings ________
Total Equity _________
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 _____________
Capital Excess of par ___________
Retained Earnings _________
Total Equity ____________
Explanation / Answer
a. Show the effect on the capital accounts of a two-for-one stock split.
Common Stock
$240000
Capital excess of par
100000
Retained earnings
454000
Total Equity
$794000
Common stock = Shares outstanding x par value per share
= (2 x 120000) x .5 x $2
= 240000 x $1 = $240000
A stock split affects the number of shares outstanding and the par value of per share but has no effect on any of the equity account balances.
b. Show the effect on the capital accounts of a 10 percent stock dividend.
Common Stock
$264000
Capital excess of par
196000
Retained earnings
334000
Total Equity
$794000
Number of new shares = Dividend percent x Number of shares outstanding
= .10 x 120000 = 12000
Common Stock = Numbers of shares outstanding x par value per share
= (120000 + 12000) x $2 = $264000
Capital in excess of par = Original account balance + [ Number of new shares x (Stock price – Par value)]
= $100000 + 12000 x (10 - 2) = $196000
Retained Earnings = Original account balance – (Number of new shares x Stock price)
= 454000 – (12000 x $10) = $334000
Common Stock
$240000
Capital excess of par
100000
Retained earnings
454000
Total Equity
$794000
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