Twin Towns, Incorporated, was authorized to issue 300,000 shares of common stock and originally issued 100,000 shares of $10 par value stock at $18 per share. Subsequently, 25,000 shares were repurchased at $20, of which 10,000 were subsequently resold at $23.Assume the company’s retained earnings balance is $120,000.Required:Prepare the stockholders’ equity section of Twin Towns’s balance sheet, including all appropriate disclosures.Briefly explain how the declaration and distribution of a 2-for-1 stock split subsequent to the above transactions would affect the stockholders’ equity section you have prepared.
Question
Twin Towns, Incorporated, was authorized to issue 300,000 shares of common stock and originally issued 100,000 shares of 18 per share. Subsequently, 25,000 shares were repurchased at 23.Assume the company’s retained earnings balance is $120,000.Required:Prepare the stockholders’ equity section of Twin Towns’s balance sheet, including all appropriate disclosures.Briefly explain how the declaration and distribution of a 2-for-1 stock split subsequent to the above transactions would affect the stockholders’ equity section you have prepared.
Solution
To prepare the stockholders' equity section of Twin Towns's balance sheet, we need to calculate the common stock, additional paid-in capital, and treasury stock.
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Common Stock: This is the par value of the stock multiplied by the number of shares issued. Twin Towns issued 100,000 shares at a par value of 1,000,000 (100,000 shares * $10/share).
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Additional Paid-In Capital (APIC): This is the amount received from the issuance of stock above its par value. Twin Towns issued 100,000 shares at 8 above the par value. So, the APIC is 8/share).
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Treasury Stock: This is the cost of the shares that the company has repurchased. Twin Towns repurchased 25,000 shares at 500,000 (25,000 shares * $20/share).
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Retained Earnings: Given as $120,000.
So, the stockholders' equity section of the balance sheet would look like this:
Common Stock: 800,000 Treasury Stock: (120,000 Total Stockholders' Equity: $1,420,000
Now, if Twin Towns declares a 2-for-1 stock split, the number of shares would double, and the par value per share would halve. However, this does not affect the total par value of the common stock or the total stockholders' equity. The only thing that changes is the number of shares and the par value per share. The APIC, treasury stock, and retained earnings would remain the same.
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