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Squash Delight Inc. has the following balance sheet: Assets   Cash $ 90,000   Accounts receivable 307,000   Fixed assets 782,000      Total assets $ 1,179,000 Liabilities   Accounts payable $ 284,000   Notes payable 51,000   Common stock (100,000...

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Accounting

Squash Delight Inc. has the following balance sheet:

Assets
  Cash$90,000
  Accounts receivable307,000
  Fixed assets782,000
     Total assets$1,179,000
Liabilities
  Accounts payable$284,000
  Notes payable51,000
  Common stock (100,000 shares @ $4 par)400,000
  Capital in excess of par100,000
  Retained earnings344,000
     Total liabilities & owners'equity$1,179,000

The firm’s stock sells for $10 a share.

a. Show the effect on the capital accounts of atwo-for-one stock split. (Do not round intermediatecalculations and round your answers to the nearest wholedollar.)
  

Effect of Stock Split
Common stock$400,000
Capital excess of par$100,000
Retained earnings$344,000
Total equity$844,000



b. Show the effect on the capital accounts of a 10percent stock dividend. Part b is separate from parta. In part b do not assume the stock split hastaken place. (Do not round intermediate calculations andround your answers to the nearest whole dollar.)
  

Effect of Stock Dividend
Common stock
Capital excess of par
Retained earnings
Total equity$0

   
  
c. Based on the balance in retained earnings,which of the two dividend plans is more restrictive on future cashdividends?

Stock dividend
Stock split

Answer & Explanation Solved by verified expert
4.0 Ratings (384 Votes)

a. Effect of stock split
Common stock $                             4,00,000
Capital excess of par $                             1,00,000
Retained earnings $                             3,44,000
Total equity $                             8,44,000
Note: Stock split will not affect the amount in total it changes the number of shares from 100000 to 200000 and par value from $4 to $2
b. Effect of stock dividend
Common stock (100000 X 110% X $4) $                             4,40,000
Capital excess of par [$100000 + [(10000 X ($10-$4)]] $                             1,60,000
Retained earnings [$344000 - $40000 - $60000] $                             2,44,000
Total equity $                             8,44,000
c. Stock dividend
As above shown retained earnings under Plan b. Of stock dividend are lower than of Plan a. Stock split which restricts further payment of cash dividend

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