【正文】 50% stock dividend device, thereby automatically issuing one additional share for each two shares outstanding. This necessitated charging retained earnings at par for the total additional shares issued because the par value was not reduced as it often is for a stock split. This way of obtaining a split has a great attraction because it does not involve the bother and expense of exchanging certificates. “Stock dividends” of 25% or more are essentially stock splits and should be accounted for as such. However, even though a stock dividend requires a reduction of the balance in Retained Earnings and an increase in Common Stock, total stockholders’ equity is unaffected. In substance, there is no important difference between the two ways of acplishing stock splits. Thus, Dean’s accounting does not conflict with the definition of a stock split—all shareholders receive additional shares without paying any additional cash and thereby maintain their percentage ownership of the pany.1039 (5–10 min.) 1. A reverse stock split, like a regular stock split, does not affect any of the account balances. Only the number of shares and the par value (which is not shown by QED) are changed.QED EXPLORATION, INC. Stockholders’ equity: Common stock, 3,000,000 shares authorized, 2,353,000 shares issued $ 287,637 Additional paidin capital 3,437,547 Retained earnings 2,220,895 Less treasury stock, at cost, 101,755 shares (305,250) Total stockholders’ equity $5,640,8292. Since the number of shares is reduced by a factor of ten, the value of each share should be ten times higher. This is one motivation for the reverse split, to increase the market value of each share. These issues are not discussed at length in the text, but the subsequent discussion could ask, why is this desirable? Two reasons may be worth discussing. Some investors avoid, or are prohibited from trading in shares valued below some threshold, for example, $1. Some stock exchanges, such as the NYSE, require minimum prices to remain listed for trading.A more subtle point relates to the transactions costs investors face. Brokers’ missions may be based on a bination of number of shares and price per shares. Higher priced shares may produce lower missions for a given percentage ownership of the firm. In a similar vein, the bid/ask spread is often an eighth or a quarter of a point. This cost is incurred per share. A reverse split reduces the number of shares involved in a $5,000 or $10,000 investment and thus may reduce transaction costs.1040 (10 min.)1. Retained Earnings 3,289,898 Dividends Payable 3,289,898 To record $.34 cash dividend declaration on 10/28/2009. $.34 (9,755,480 – 79,310) = $3,289,8982. Retained earnings 33,176,718 Common stock 73,726 Additional paidin capital 33,102,992 To record 10% stock dividend. 10% (7,397,133 – 24,529) $ = $33,176,7183. 1995: 100 = 110 1998: 110 = 165 2003: 165 = 2005: = 2006: = Normally partial shares are paid in cash so an equally good answer is: 2003: 181 2005: 181 = 199 2006: 199 = 2181041 (5–10 min.)1. Treasury stock 58,005 Cash 58,005 Purchase treasury stock for $ 180。77 = 165。 Preferred Dividends 165。55,0942. In the United States, par value is usually small in relation to the issue price of mon shares. For Kawasaki Heavy Industries, the par value is 165。 – 165。62 1, = 165。62 par value shares issued at 165。 1, shares = 165。 they buy them from other investors in the market. Thus, what a shareholder pays is often quite different from his or her share of stockholders’ equity (book value per share). An individual investor’s return is best measured by dividends plus price increase divided by the price paid for the shares.1025 A mon stock with a market price of less than book value may not necessarily be an attractive investment. The forecasted earnings of the pany may be too low to justify a higher market price. The book value may not recognize a large contingent liability from a law suit. For example, a major uncertainty for tobacco panies relates to the possibility that lawsuits by former smokers will be successful. While the risk is real, the oute is far too uncertain to record on the books. Further, book value includes the original costs of assets, which may be far below or above their current values.1026 This is a reasonable argument if panies were allowed to repurchase shares without investors knowing what they were doing. However, in the United States, panies must announce programs to repurchase shares and are restricted from trading around the time of certain information events such as earnings releases. So, as long as the pany announces that they will be repurchasing before doing so, it does not seem there is much of a problem. As pointed out in the text, everyone is better off with repurchases than with dividends. Repurchases allow those who desire cash to obtain it at lower tax cost than if it were received as a dividend and protects those who do not want cash from receiving a dividend, paying taxes, and having to reinvest the after tax proceeds from the dividend. Further, no shareholder is forced to sell shares back to the pany.1027 The notion of gains or losses in the ine statement that arise from transactions in the pany’s own stock is problematic for two reasons. First, it suggests that the pany is in the business of buying and selling its own stock. This is false. The pany should never seek to make gains or losses in transactions with its shareholders. So if it is not an activity that is part of the ongoing profitmaking intention of the pany, it should not be shown in the ine statement. Moreover, panies announce their intentions to buy shares of their stock. It is basically a transaction that is an a