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Exercise 11-7: Compare effects of a stock dividend and a stock split. E11-7 On October 31,...

Exercise 11-7: Compare effects of a stock dividend and a stock split.

E11-7 On October 31, the stockholders' equity section of Manolo Company's balance sheet consists of common stock $648,000 and retained earnings $400,000.

Manolo is considering the following two courses of action: (1) declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding or (2) effecting a 2‐for‐1 stock split that will reduce par value to $4 per share.

The current market price is $17 per share.

Instructions: Prepare a summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares.

Stockholders’ equity section:

Before Stock Split

Impact of Dividend

After Stock Dividend

Paid-in capital

$ 648,000

Retained earnings

$ 400,000

Total stockholders’ equity

$1,048,000

Outstanding shares

81,000

Par Value

$4

Stockholders’ equity section:

Before Stock Split

Impact of Stock Split

After Stock Split

Paid-in capital

$ 648,000

Retained earnings

400,000

Total stockholders’ equity

$1,048,000

Outstanding shares

81,000

Par Value

$4

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