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Mario's Fencing has the following balance sheet:AssetsCash:  $100,000Accounts Receivable: $300,000Fixed Assets:  $600,000TOTAL assets:  $1,000,000Liabilites:Accounts Payable: $150,000Notes Payable:  $50,000CAPITAL ACCOUNTSCommon Stocks (50,000 shares @ $2 par):  $100,000Captial in excess of par:  $200,000Retained earnings:  $500,000TOTAL:  $1,000,000The company's stock sells for $10 a share:A. Show the effect on the capital account(s) of a two-for-one split, breaking down by common stock, capital excess of par, and retained earnings.B. Show the effect on the capital accounts of a 10 percent stock dividend, breaking down by common stock, capital excess of par, and retained earnings. (Part b is separate from part a.  Part b, assume the stock split has NOT taken place).C.  Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

Question

Mario's Fencing has the following balance sheet:

Assets

  • Cash:  $100,000
  • Accounts Receivable: $300,000
  • Fixed Assets:  $600,000
    • TOTAL assets:  $1,000,000

Liabilites:

  • Accounts Payable: $150,000
  • Notes Payable:  $50,000
    • CAPITAL ACCOUNTS
      • Common Stocks (50,000 shares @ $2 par):  $100,000
      • Captial in excess of par:  $200,000
      • Retained earnings:  $500,000
        • TOTAL:  $1,000,000

The company's stock sells for $10 a share:

A. Show the effect on the capital account(s) of a two-for-one split, breaking down by common stock, capital excess of par, and retained earnings.

B. Show the effect on the capital accounts of a 10 percent stock dividend, breaking down by common stock, capital excess of par, and retained earnings. (Part b is separate from part a.  Part b, assume the stock split has NOT taken place).

C.  Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

check_circleAnswer
Step 1

In the share split, the number of existing shares are split into two shares for each share. So, the number of shares outstanding doubles, the par value is halved and the share price of each share is halved

In the stock dividend, the company issues additional shares to its existing stockholder. Since, 10% stock dividend is declared, 5000 additional shares need to be issued. The retained ear...

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