Question

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Explanation:

Identify the characteristics of a stock split

A stock split increases the number of outstanding shares and proportionally decreases the par value per share. The total par value of outstanding stock, total paid-in capital, retained earnings, and total stockholders' equity remain completely unchanged. No journal entry is recorded; only a memorandum entry is made.

Calculate the new number of shares

Using a 2-for-1 stock split ratio:

$$ \text{New Shares} = 100,000 \times 2 = 200,000\text{ shares} $$

Calculate the new par value per share

Using a 2-for-1 stock split ratio:

$$ \text{New Par Value} = \frac{\$5.00}{2} = \$2.50\text{ per share} $$

Determine the correct statement

The split results in 200,000 shares of \$2.50 par value common stock outstanding. Retained earnings remains unchanged at \$2,000,000, and total equity remains unchanged.

Answer:

• (A) Retained Earnings remains unchanged at \$2,000,000, and the number of outstanding shares increases to 200,000 with a par value of \$2.50 per share. (Correct answer)
• (B) Retained Earnings decreases by \$500,000, and the number of outstanding shares increases to 200,000.
• (C) Retained Earnings increases to \$4,000,000, and the par value remains \$5 per share.
• (D) A journal entry is required to debit Retained Earnings and credit Common Stock for \$500,000.