The December 31, 1994, balances in Retained Earnings and Additional Paid-In Capital for Railway Shippers Company are $135,000 and $50,000, respectively. Five thousand, $10 par value common shares are outstanding with a market value of $85 each. The company’s cash posi¬ tion at year-end is lower than usual, so the board of directors is considering issuing a stock divi¬ dend instead of the normal cash dividend. They are considering the three options listed below. Option 1: A 10 percent stock dividend: 500 new shares would be issued. Option 2: A 20 percent stock dividend: 1,000 new shares would be issued. Option 3: A 2:1 stock split: 5,000 new shares would be issued. REQUIRED:

a. Prepare the journal entry for Options 1 and 2 above, and comment on why these alterna¬ tives may not be attractive. Why do companies issue stock dividends?

b. What effect would Option 3 have on the financial statements?

c. Why do companies split their stock?