Cost Method stock split question. Please HELP

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  • #187420
    Anonymous
    Inactive

    Pugh Co. reported the following in its statement of stockholders' equity on January 1 of the current year:

    Common stock, $5 par value, authorized 200,000 shares, issued 100,000 shares $ 500,000

    Additional paid-in capital 1,500,000

    Retained earnings 516,000

    Total 2,516,000

    Less treasury stock, at cost, 5,000 shares (40,000)

    Total stockholders' equity $ 2,476,000

    The following events occurred during the current year:

    May 1: 1,000 shares of treasury stock were sold for $10,000.

    July 9: 10,000 shares of previously unissued common stock were sold for $12 per share.

    October 1: The distribution of a 2-for-1 stock split resulted in the common stock's per share par value being halved.

    Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh's incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared.

    In Pugh's December 31 statement of stockholders' equity, the par value of the issued common stock should be:

    a. $518,000

    b. $291,000

    c. $550,000

    d. $275,000

    Explanation

    Choice “c” is correct. $550,000.

    My question: I understand they got 100,000 shares, added 10,000 more – 110,000. Then 2-for-1 split = 220,000 * 2.5 (reduced PAR) = $550,000. However, why did they not take the sold treasury stock into consideration?

    Thanks in advance

    #610667
    Anonymous
    Inactive

    @cpahelpneeded, not sure if you still need this help, but I was also struggling with this questions. I believe I figured it out.

    So the question is asking only for par value of the ISSUED common stock. Issued is the main word on this, I was missing this also. So they originally issued the 100,000 shares of stock with a par value of $5. Then they sold 1,000 of treasury stock, this stock was already issued stock and was bought back, for whatever amount, therefore I believe that it was already included in the issued common stock total already.

    Then it says that 10,000 shares of unissued common stock were sold, therefore that needs to be included because at the beginning of the year it wasn't issued.

    So the number of shares that are issued is 110,000 with a $5 par value per share. Then there is a 2-for-1 stock split. Which would mean that there is 220,000 shares at $2.50 par value per share. That is how they get the $550,000 for the par value of the ISSUED stock.

    The reason why the Treasury stock is not included is because they aren't asking for the outstanding common share.

    Such as this question:

    Pugh Co. reported the following in its statement of stockholders' equity on January 1 of the current year:

    Common stock, $5 par value, authorized 200,000 shares, issued 100,000 shares $ 500,000

    Additional paid-in capital 1,500,000

    Retained earnings 516,000

    Total 2,516,000

    Less treasury stock, at cost, 5,000 shares (40,000)

    Total stockholders' equity $ 2,476,000

    The following events occurred during the current year:

    May 1 – 1,000 shares of treasury stock were sold for $10,000.

    July 9 – 10,000 shares of previously unissued common stock were sold for $12 per share.

    October 1 – The distribution of a 2-for-1 stock split resulted in the common stock's per share par value being halved.

    Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh's incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared.

    The number of outstanding common shares at December 31 should be:

    a. 212,000

    b. 222,000

    c. 216,000

    d. 220,000

    Explanation

    Choice “a” is correct. 212,000.

    Original shares outstanding 100,000

    Less: Shares in treasury (5,000)

    Plus: Treasury shares sold 1,000

    Plus: New shares issued 10,000

    Total shares O/S before split 106,000

    Two-for-one stock split × 2

    Shares O/S after stock split 212,000

    So do you see the difference in the question? Because I had the same thought as you for a while now.

    Hope this helped, and was in time for your test.

    #3099668
    porkburrito
    Participant

    This reply is really helpful. Thank you!

    Studying for FAR (09/13/2020)
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