Overview
This lecture explains the accounting treatment and financial statement presentation of stock splits and stock dividends, including the calculation and journal entries involved.
Stock Splits
- A stock split increases the number of shares outstanding by issuing more shares to existing shareholders.
- After a stock split, the par value per share decreases while total par value remains the same.
- Stock splits do not require a journal entry, only a memorandum note in the records.
Stock Dividends
- A stock dividend distributes additional shares to shareholders, increasing the number of shares but not changing total equity.
- Small stock dividends (less than 20-25%) are recorded at market value.
- Large stock dividends (greater than 20-25%) are recorded at par value.
- The entry for a small stock dividend involves debiting Retained Earnings for market value, crediting Common Stock for par value, and crediting Paid-in Capital for the remainder.
- The entry for a large stock dividend debits Retained Earnings and credits Common Stock for par value only.
Calculations & Examples
- In a 2-for-1 stock split, each share is split into two, doubling the number of shares.
- Example: 1,000 shares at $20 par value become 2,000 shares at $10 par value after a 2-for-1 split.
- For a 10% stock dividend on 1,000 shares at $20, 100 new shares are issued.
- For a small dividend, use current market price in calculations; for large, use par value.
Financial Statement Effects
- Stock splits do not affect total stockholders’ equity or net assets.
- Stock dividends decrease Retained Earnings and increase Common Stock, keeping total equity unchanged.
Key Terms & Definitions
- Stock Split — Issuance of more shares to shareholders, reducing par value and increasing outstanding shares without changing equity.
- Stock Dividend — Distribution of additional shares to shareholders, transferring value from Retained Earnings to Common Stock.
- Par Value — The nominal or face value assigned to shares of stock.
Action Items / Next Steps
- Review related textbook sections on stock splits and dividends.
- Practice journal entries for small and large stock dividends.
- Prepare for quiz questions on the calculation and effects of stock splits and dividends.