The December 31, 2014, balances in retained earnings and additional paid-in capital for Railway Shippers Company are $135,000 and $50,000, respectively. Five thousand $10 par value common shares are outstanding with a market value of $85 each. The company’s cash position at year-end is lower than usual, so the board of directors is considering issuing a stock dividend instead of the normal cash dividend. They are considering the following options:
Option 1: A 10 percent stock dividend: 500 new shares would be issued.
Option 2: A 20 percent stock dividend: 1,000 new shares would be issued.
Option 3: A 2:1 stock split: 5,000 new shares would be issued.
a. Prepare the journal entries for Options 1 and 2, and comment on why these alternatives may not be attractive. Why do companies issue stock dividends?
b. What effect would Option 3 have on the financial statements?
c. Why do companies split their stock?

  • CreatedAugust 19, 2014
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