Question

Stock Dividends versus Stock Splits

Campbell Company wants to increase the number of shares of its common stock outstanding and is considering a stock dividend versus a stock split. The Stockholders' Equity section of the firm's most recent balance sheet appeared as follows:

Common stock, $10 par, 50,600 shares issued and outstanding	$506,000
Additional paid-in capital	860,200
Retained earnings	880,100
Total stockholders' equity	$2,246,300

If a stock dividend is chosen, the firm wants to declare a 100% stock dividend. Because the stock dividend qualifies as a "large stock dividend," it must be recorded at par value. If a stock split is chosen, Campbell will declare a 2-for-1 split.

Required:

1. Compare the effects of the stock dividends and stock splits on the accounting equation. If an amount is zero, enter "0". Indicate whether the assets, liabilitiies and stockholders' equity increases/decreases/has no effect based on stock dividend and stock split and the amount each item is affected by.

2. a. Develop the Stockholders' Equity category of Campbell's balance sheet after the stock dividend.

2. b. Develop the Stockholders' Equity category of Campbell's balance sheet after the stock split.

Answer 1

Answer 1

For 100% stock dividend entry would be:

Retained earnings--------Dr 506,000

Common Stock -----------Cr 506,000

For stock split :

No of shares will increase to:

50600*2/1= 101,200

Price of share will reduce as under:

=506,000/101,200=5

Answer 2 a

Stockholders' Equity category of Campbell's balance sheet after the stock dividend.

Common Stock: 1,012,000

(50600 shares @20)

Additional paid in capital 860,200

Retained Earnings 374,100

Total stockholders' equity $2,246,300

Answer 2 b

Develop the Stockholders' Equity category of Campbell's balance sheet after the stock split

Common Stock: 506,000

(101200 shares @5)

Additional paid in capital 860,200

Retained Earnings 880,100

Total stockholders' equity $2,246,300