Explain the Changes in the Equity Section of the Balance Sheet as a Result of the Five Transactions

Jimmy Fu

1. Explain the changes in the equity section of the balance sheet as a result of the five transactions.

Transaction 1: three-for-two stock split of Class A and Class B common stock effected in the form of a 50% stock distribution (dividend).

In a share split in the form of a stock dividend, the company issues new additional shares. In a three-for-two split, shareholders get three new shares per each two old shares. In contrast to normal stock split, in stock distribution, the par value remains the same, but the number of shares increase. All shareholders receive the same number of additional shares, so they will still own the same proportion of the company. In this case, each shareholder will receive one additional stock for each two stocks owned.

Moog issued 12,573,893 new Class A shares (equal to 25,147,785/2), so the Class A shares outstanding become 34,366,092 and Class A shares held in treasury became 3,355,586. Moreover, it issued 2,671,304 new Class B shares (equal to 5,342,607/2), so the Class B shares outstanding become 4,192,473 and Class B shares held in treasury became 3,821,438. Common stock in Moog (Class A and Class B) increases by 15,245,196 (number of shares issued) x $1 (par value) = $15,245,196.  Retained earnings are reduced by this amount.

After a stock split the market stock price will adjust accordingly, so the investors’ total investment in the company would be the same. Each investor will have the same proportional interest of Moog shares before and after the stock split.

When dividends are made by way of stock distributions, the retained earnings are reduced by the market value of the stock distribution if the distribution is less than 20-25% of the outstanding shares and by the par value of the stock being distributed otherwise. In this case, the stock distribution is 50% of the outstanding shares, so the retained earnings are reduced by the par value of the stock issued $15,245,196. Since the total shareholders’ equity increased because of the common stock and decreased because of the retained earnings, it remains as it was before the stock split. When a stock splits, call and put options are adjusted or split accordingly.

Transaction 2: purchase of 112,199 Class A shares on the open market at an average price of $29.70 per share (including trading costs).

Moog repurchased its own shares. The number of Class A shares outstanding decreases as shares held in treasury are considered issued but not outstanding. Class A shares outstanding become 34,253,893 (=34,366,092 – 112,199). The company repurchased the shares at an average price of $29.70 per share, for a total value of $3,332,310.  Shares held in treasury do not give voting rights to their shareholders and they do not receive cash dividends. Moog accounts for shares held in treasury using the cost method. Accounting for treasury shares: