Company A has 1,000 shares of $1 common stock. Owner A owns 60% and Owner B owns
Question:
Company A has 1,000 shares of $1 common stock. Owner A owns 60% and Owner B owns 40%.
Its Equity Section of its BS looks like this:
Common Stock $1,000
Paid in Capital $500
Retained Earnings $500
Total Equity $2,000
If Company A issued a 2 for 1 split, the balance sheet would remain the same. The only difference would be that Owner A would own 1200 shares of stock and Owner B would own 800 shares of stock. However, the $ value would remain the same (Owner A $600, Owner B $400).
If Company A issued a 1 % stock dividend (assume the stock did not split), the Equity Section would look like this:
Common Stock $1,010
Paid in Capital $500
Retained Earnings $490
Total Equity $2,000
Owner A would now own 606 shares and Owner B would now own 404 shares. However, the $ value of their investments would also change as Owner A would have $606 invested in the company and Owner B $404. However, just as in a stock split, their % of ownership has not changed. However, in a stock dividend, money is transferred from RE to Common Stock.
Now suppose company A issued a 1% cash dividend instead of a stock dividend? How would things change?
Intermediate Accounting Reporting and Analysis
ISBN: 978-1285453828
2nd edition
Authors: James M. Wahlen, Jefferson P. Jones, Donald Pagach