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Stock Split and Stock Dividends

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Squash Delight, Inc has the following balance sheet:
Assets
Cash $100,000
Accounts Receivable 300,000
Fixed Assets 600,000
Total Assets $1,000,000

Liabilities

Accounts Payable $150,000
Notes Payable 50,000
Common Stock 50,000 @
$2 par 100,000
Capital in excess of par 200,000
Retained earnings 500,000
$1,000,000

The firm's stock sells for $10 a share.
a. Show the effect on the capital account(s) of a two-for-one stock split.
b. Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place.
c. Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?
I need so help getting started on this one.

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Solution Summary

The solution explains the effect of a stock split and a stock dividend.

Solution Preview

a. Show the effect on the capital account(s) of a two-for-one stock split.

In a stock split, the par value is reduced and the number of shares increase. There is no change in the capital account values. A 2 for 1 split means that for each share the investors will get 2 shares. The par value which is currently $2 will become $1 and the number of shares which are 50,000 will become 100,000. The Common Stock account value will still be 100,000 (100,000 shares @$1)
Common Stock ...

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