On December 31, 2017, Nehpton Ltd. reported $3 million of common shares and $6 million of retained earnings. On that date, the company had five million shares authorized and two million outstanding. Management is considering a 10 percent stock dividend or a two-for-one stock split and would like to know the impact on the equity section of the two transactions.

Required:

a. Prepare the equity section of Nehpton’s balance sheet under the following conditions:

i. As originally reported;

ii. If management declared a 10 percent stock dividend;

iii. If management declared a two-for-one stock split.

b. Explain how earnings per share would be affected in each case. Which situation would be most attractive to the shareholders?