Question

On October 31, the stockholders’ equity section of Pharoah Company’s balance sheet consists of common stock $680,000 and retained earnings $395,000. Pharoah is considering the following two courses of action:

(1)		Declaring a 5% stock dividend on the 85,000 $8 par value shares outstanding
(2)		Effecting a 2-for-1 stock split that will reduce par value to $4 per share.

The current market price is $13 per share.

Prepare a tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares.

Pharoah Company’s Balance Sheet
		Before Action		After Stock Dividend		After Stock Split
Stockholders’ equity
Paid-in capital		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount
Retained earnings		enter a dollar amount		enter a dollar amount		enter a dollar amount
Total stockholders’ equity		$enter a total of the two previous amounts		$enter a total of the two previous amounts		$enter a total of the two previous amounts
Outstanding shares		enter a number of shares		enter a number of shares		enter a number of shares

Answer 1

Prepare a tabular summary of the effects of the alternative actions on the company’s stockholders’ equity and outstanding shares.

Pharoah Company’s Balance Sheet
		Before Action		After Stock Dividend		After Stock Split
Stockholders’ equity
Paid-in capital		680000		85000*5%*13+680000 = 735250		680000
Retained earnings		395000		395000-55250 = 339750		395000
Total stockholders’ equity		1075000		1075000		1075000
Outstanding shares		85000		85000*1.05 = 89250		85000*2 = 170000