Question

Exercise 14-04

On October 31, the stockholders’ equity section of Cullumber Company consists of common stock $260,000 and retained earnings of $882,000. Cullumber is considering the following two courses of action: (1) declaring a 4% stock dividend on the 26,000, $10 par value shares outstanding, or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $16 per share.

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share.

		Before Action		After Stock Dividend		After Stock Split
Stockholders’ equity
Paid-in capital
Common stock		$		$		$
In excess of par
Total paid-in capital
Retained earnings
Total stockholders’ equity		$		$		$
Outstanding shares
Par value per share		$		$		$

Answer 1

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share.

		Before Action		After Stock Dividend		After Stock Split
Stockholders’ equity
Paid-in capital
Common stock		$260000		$27040*10 = 270400		$ 260000
In excess of par				26000*4%*6 = 6240		0
Total paid-in capital		260000		276640		260000
Retained earnings		882000		882000-1040*16 = 865360		882000
Total stockholders’ equity		$1142000		$1142000		$1142000
Outstanding shares		26000		26000*1.04 = 27040		26000*2 = 52000
Par value per share		$10		$10		$10/2 = 5