Question

On October 31, the stockholders' equity section of Night King Company's balance sheet consists of common stock $500,000 and retained earnings $500,000. Night King is considering the following two courses of action: (Action #1) declaring a 10% stock dividend on the 50,000 $10 par value shares outstanding or (Action #2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share.

Make the calculations below (Dollar signs and commas are not necessary.):

Calculate total paid-in capital (Common stock + paid in capital in excess of par) under Action #1:  

Calculate total paid-in capital (Common stock + paid in capital in excess of par) under Action #2:  

Calculate outstanding shares under Action #1:  

Calculate outstanding shares under Action #2:  

Answer 1

Actuon 1 :

Stock dividend = 5,000 shares × 15 = 75,000

Outstanding shares = 50,000 + 5,000 = 55,000

Total paid in capital = 5,75,000

=Common stock + paid in capital - excess of par

= 550,000 (55000 × 10) + 25000 (5000 ×5)

= 5,50,000 + 25000

= 5,75,000

Action - 2

Outstanding shares = 100,000

(As stock splits 2 for 1 so 50,000 shares become 100,000)

Total paid in capital = 500,000  (100,000 × 5 per share)

= Common stock + paid up capital - in excess of par

= 500,000 + 0

= 500,000.

(When the stock splits par value decreaes in same proportion )

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