To solve this problem, we need to understand the concept of a stock split and how it affects the retained earnings of a company.
A stock split is a corporate action that increases the number of shares outstanding without changing the total value of the shares. In a 2-for-1 stock split, each existing share is split into two new shares. This means that if a company had 10,000 shares before the split, after the split it will have 20,000 shares.
When a stock split is declared and issued, there is no actual change in the company's assets or liabilities. However, the number of outstanding shares increases, which has an impact on the stockholders' equity section of the balance sheet.
To calculate the reduction in retained earnings resulting from a 2-for-1 stock split, we need to determine the value of the stock before and after the split.
Before the split:
- Number of shares issued and outstanding: 274,000
- Par value per share: $10
- Total Common Stock: 274,000 shares * $10 par value = $2,740,000
After the split:
- Number of shares issued and outstanding: 274,000 shares * 2 = 548,000
- Par value per share: $10
- Total Common Stock: 548,000 shares * $10 par value = $5,480,000
The reduction in retained earnings resulting from the stock split is the difference between the total common stock before and after the split.
Reduction in Retained Earnings = Total Common Stock before split - Total Common Stock after split
= $2,740,000 - $5,480,000
= -$2,740,000
Therefore, the reduction in retained earnings resulting from the 2-for-1 stock split is $2,740,000.