Q33E_2 - Horngren'S Financial And Managerial Accounting

Question

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

b. A 2-for-1 stock split. Prior to the split, 66,000 shares of $5 par value common stock were outstanding

Step-by-Step Solution

Answer

The post- split shares will be 132,000 shares and post- split price will be $2.5 and thus it will make no changes in the amount of stock and shareholder’s equity overall.

Step 1: Basic Introduction

$\begin{array}{rcl}\mathbf{NumberofSharesAfterStockSplit}& \mathbf{=}& \mathbf{NumberofShares}\mathbf{\times }\mathbf{StockSplit}\\ & \mathbf{=}& \mathbf{66}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{2}\\ & \mathbf{=}& \mathbf{132}\mathbf{,}\mathbf{000}\\ & & \end{array}$

$\begin{array}{rcl}\mathbf{StockPriceAfterStockSplit}& \mathbf{=}& \frac{\mathbf{PriceBeforeStockSplit}}{\mathbf{StockSplit}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{5}}{\mathbf{2}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{.}\mathbf{5}\\ & & \end{array}$

Step 2: The effect of stock dividends, stock splits, and treasury stock transactions

The stock split will not make any effect on the total amount of Shareholder’s equityas it will not make any changes in the total amount of any sub- heads included under it.