Exercise 11-7 On October 31, the stockholders\' equity section of Cullumber Comp

Question

Exercise 11-7 On October 31, the stockholders' equity section of Cullumber Company's balance sheet consists of common stock $513,000 and retained earnings $414,000. Cullumber is considering the following two courses of action: (1) Declaring a 6% stock dividend on the 85,500 $6 par value shares outstanding (2) Effecting a 2-for-1 stock split that will reduce par value to $3 per share. The current market price is $14 per share. Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Cullumber Company's Balance Sheet Before Action After Stock Dividend After Stock Split Stockholders' equity Paid-in capital Retained earnings Total stockholders' equity Outstanding shares

Explanation / Answer

Cullumber Company's Balance sheet Before action After stock dividend After stock split Stockholders' equity Paid in capital $                       513,000 $513,000+(85,500*6%*$14) = $584,820 $                   513,000 Retained earnings $                       414,000 $414,000 - (($85,500*6%)*$14)) = $342,180 $                   414,000 Total stockholders' equity $                       927,000 927000 $                   927,000 Outstanding shares $513,000/$6 = 85,500 85,500+(85,500*6%) = 90,630 85,500*2 = 171,000

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