Exercise 14-04 On October 31, the stockholders’ equity section of Cullumber Company consists of common stock $370,000 and retained earnings $904,000. Cullumber is considering the following two courses of action: (1) declaring a 6% stock dividend on the 37,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $16 per share. Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share.

Explanation:

1. Before action

The company is having the 37000 shares of $10 each outstanding.

Par value of outstanding shares = $10 * 37000 shares = $370,000

Common stock in excess of par = Total common stock - Par value of outstanding shares = $370,000 - $370,000 = 0

2. After stock dividennd

Stock dividend declared = 6% of 37,000 shares = 2,220 shares

Current market price of shares = $16 per share

Value of stock dividend declared = $16 * 2,220 = $35,520

Common stock in excess of par = $35,520 - $22,200 = $13,320

Total number of shares outstanding = 37,000 + 2,220 = 39,220

Total par value of common stock = 39,220 * $10 = $3,92,200

The stock dividend is declared out of the retained earnings.

Retained earnings after stock dividend = $904,000 - $35,520 = $868,480

3. After stock split

In this case, there is no financial impact. Only, the number of shares will get double because one share is split into two shares.

No. of outstanding shares = 37000 * 2 = 74000 shares