11. Gilbert Corporation\'s board of directors approved a 2-for-1 common stock sp
ID: 2595572 • Letter: 1
Question
11. Gilbert Corporation's board of directors approved a 2-for-1 common stock split. $10 par value before the split. At what amount shouldretained eamings be reduced for the additional shares issued? a. b. C. d. The common stockhada Retainedeamings is not affectedby a stock split. Par value of the new shares. Market value ofthe new shares on the declaration date. Market value of the new shares on the distribution date. 12. Which ofthe following items is included on the statement ofretained eamings? a. b. C. d. The effects ofextraordinary items. The effects of discontinued operations. The effects ofa change in accountingprinciple Prior penod adjustments.Explanation / Answer
11. a. Retained Earnings is not affected by a stock - split. A stock split is a decision by the company's board of directors to increase the number of shares that are outsatnding b issuing more shares to current shareholders. After a split, the stock price will be reduced since the number of shares outsatnding will increase. In the given example, the share price will be halved to $5 par value and shares outstanding will be doubled. However, the market capitalization will remain the same. In the entire process however the retained earnings is not affected at all. Only the number of outstanding shares and the price of shares change.
12. d. Prior period adjustments is included on the statement of retained earnings. Prior period adjustments can be in the form of correction for an error in the financial statements of a prior period or any adjustment on account of the beenfits arising from some transactions related to prior period. Such adjustments can be given effect to by a prior period adjustment in the current period. The amount of the adjustment , net of tax is used to increase or decrease beginning retained earnings on the current retained earnings statement to arrive at adjusted beginning retained earnings.
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