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# Stock Split and Stock Dividends

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.

#### 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 ...

#### Solution Summary

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

\$2.19