Question

A Saudi company was approved as a corporation in Jan 2018. The company decided to issue...

A Saudi company was approved as a corporation in Jan 2018. The company decided to issue 5000 common shares in June at SR 20 per share. According to charter, the company is authorized to issue 50,000 shares.

Required:

What is the effect on financial position of the company under each of the following alternatives?

  • The stock has par value of SR 20
  • The stock has a par value of SR 10
  • The stock has no par value and stock has a stated value of SR 5 per share
  • On Jan the board of directors declared 3 for 1 stock split of its 25 par value common stock.

Note: use the accounting equation to answer

Business   Accounting   
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Homework Answers

Answer #1
Assets = Liabilities + Stockholders' Equity
Cash Common Stock Paid-in Capital in Excess of Par / Stated Value
The stock has par value of SR 20 100,000 0 100,000 0
The stock has par value of SR 10 100,000 0 50,000 50,000
The stock has a stated value of SR 5 100,000 25,000 75,000
3 for 1 Stock Split 0 0 0 0

A stock split would not impact the accounting equation. But the number of shares would quadruple, , i.e 5,000 shares would now be 5,000 + ( 5,000 x 3 ) = 20,000 shares. New par value of each share = SR 25 /4 = SR 6.25.

The book value of the stock remains unchanged at SR 6.25 x 20,000 = SR 125,000.

Book value of the stock prior to the stock split = 5,000 x SR 25 = SR 125,000.

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