Question

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

Answer 1