Question

Smart Mart Inc. is considering one of three options: (1) paying a $0.40 cash dividend, (2) distributing a 5% stock dividend, or (3) effecting a 2-for-1 stock split. The current fair value is $14 per share. Instructions In the chart below, indicate the financial impact on the financial statement items listed of each action under consideration. Before Action (1) After Cash Dividend (2) After Stock Dividend (3) After Stock Split Total assets $1.875,000 Total liabilities $ 75.000 Common shares 1.200.000 Retained earnings 600.000 Total shareholders' equity 1.800.000 Total liabilities and shareholders' equity $1,875,000 Number of common shares 60,000

Answer 1

	Before Action	1. After Cash Dividend	2. After Stock Dividend	3. After Stock Split
Total Assets	$1,875,000	$1,851,000	$ 1,875,000	$ 1,875,000
Total Liabilities	75,000	75,000	75,000	75,000
Common Shares	1,200,000	1,200,000	1,242,000	1,200,000
Retained Earnings	600,000	576,000	558,000	600,000
Total Shareholders Equity	1,800,000	1,776,000	1,800,000	1,800,000
Total Liabilities and Shareholders Equity	$ 1,875,000	1,851,000	1,875,000	1,875,000
Number of Common Shares	60,000	60,000	63,000	120,000

Cash dividends = 60,000 shares @ $ 0.40 = $ 24,000.

Stock dividends = 60,000 x 5 % x $ 14 = $ 42,000.