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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Effect of cash dividend and stock split

Indicate whether the following actions would (+) increase. (-) decrease, or (0) not affect Indigo Inc.'s total assets, liabilities, and stockholders' equity:

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To determine

Stock Splits: It is a method of increasing the total number of outstanding shares thereby, reducing the market price of each share, however, keeping the corporation’s total market value constant.

Stock Dividends:  It refers to the payment of the dividend to its shareholders by the corporation in the form of shares rather than cash is referred as stock dividend.

To indicate: The whether each of the events related to cash dividend and stock split would increase (+), decrease (–), or not affect (0) the total assets, liabilities, and stockholders’ equity of Incorporation I.

Explanation

Indicate whether each of the actions related to cash dividend and stock split would (+), (–), or (0) the total assets, liabilities, and stockholders’ equity of Incorporation I.

Actions Assets Liabilities Stockholders’ equity
(1) Authorizing and issuing stock certificates in a stock split 0 0 0
(2) Declaring a stock dividend 0 0 0
(3) Issuing stock certificates for the stock dividend declared in (2) 0 0 0
(4) Declaring a cash dividend 0 +
(5) Paying the cash dividend declared in (4) 0

Description:

(1)

Authorizing and issuing stock certificates in a stock split does not affect assets, liabilities, and stockholders’ equity of Incorporation I, since stock split does not change the total value of the common stock. Stock split affects only the number of shares outstanding the price per share.

(2)

Declaration of stock dividends does not affect assets, liabilities, and stockholders’ equity of Incorporation I. Declaration of stock dividends would increase the stock dividends and stock dividends distributable. An increase in stock dividend decreases the stockholders’ equity, since it decreases the retained earnings, and an increase in stock dividends distributable increases the stockholders’ equity...

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