Question

On June 30, 2017, Sharper Corporation’s common stock is priced at \(62 per share before any stock dividend or split, and the stockholders’ equity section of its balance sheet appears as follows.

Common stock—\)10 par value, 120,000 shares

authorized, 50,000 shares issued and outstanding . . . . . . . . . . . . . \( 500,000

Paid-in capital in excess of par value, common stock . . . . . . . . . . . . . . 200,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)1,360,000

1. Assume that the company declares and immediately distributes a 50% stock dividend. This event is recorded by capitalizing retained earnings equal to the stock’s par value. Answer these questions about stockholders’ equity as it exists after issuing the new shares.

a. What is the retained earnings balance?

b. What is the amount of total stockholders’ equity?

c. How many shares are outstanding?

2. Assume that the company implements a 3-for-2 stock split instead of the stock dividend in part 1.

Answer these questions about stockholders’ equity as it exists after issuing the new shares.

a. What is the retained earnings balance?

b. What is the amount of total stockholders’ equity?

c. How many shares are outstanding?

3. Explain the difference, if any, to a stockholder from receiving new shares distributed under a large stock dividend versus a stock split.

Short answer

(1) Stock dividend

(a) $410,000

(b) $1,360,000

(c) 75,000

(2) Stock split

(a) $660,000

(b) $1,360,000

(c) 75,000 shares

(3) Both stock-split and stock dividends provides the additional shares to the shareholders.

Step-by-step solution

Step1:Distribution of  50% stock dividend

a) Retained earnings balance after stock dividend

Retained earnings will get reduced by 250,000 (25,000*10) and common stock will get increased.

	Amount
Retained earnings before stock dividend	$ 660,000
Less: Adjustment on account of stock dividend ((50,000 x 50%) x $10)	(250,000)
Retained earnings After stock dividend	$ 410,000

b) Amount of total stockholders’ equity

In Stock Dividend – there will be no effect to stockholders’ equity in stock dividend,Therefore, Total Stockholders’ equity is$1,360,000.

c) Shares outstanding

	Number
Number of shares before stock dividend	50,000
Add: On account of stock dividend (50,000 x 50%)	25,000
Number of shares after stock dividend	75,000

Step 2:Effect of Stock split

a) Retained earnings balance after split

	Amount
Retained earnings before stock split	$ 660,000
Less: Adjustment on account of stock split	-
Retained earnings After stock split	$ 660,000

b) Amount of total stockholders’ equity

In Stock split – there will be no effect to stockholders’ equity in stock split.

Therefore, Total Stockholders’ equity is$1,360,000.

c) Shares outstanding

	Number
Number of shares before stock split	50,000
Number of shares after stock split (50,000 x 3/2)	75,000

Step 3:Difference – Stock split Vs Stock dividend

The 50% stock dividend provides you no direct income. A stock dividend can reveal positive expectations and also improve a stock’s marketability by making it more affordable. This means a stock dividend typically reveals good news, which usually increases (slightly) the stock’s market value. Same applicable to the 3-for-2 stock split.