130. Stock Dividends and Splits (do MC questions)

Pure Stock Splits

- A stock split is NOT a dividend, therefore there are no journal entries needed. Effects of Stock Splits: 1. Increases number of shares outstanding and decreases the par or stated value per share 2. Equity accounts are unaffected by the split 3. Reduces market price of the stock - ex. if market price was $200 and there's a 2-for-1 split, then the market price will now be $100 - Sometimes companies do splits to lower prices on purpose since they might be afraid that their target investors won't be able to invest when the price is too high

Categories for Stock Dividends

1. "Small" Stock Dividend: Less than 20-25% of outstanding shares at the date of declaration - Capitalized at fair value on the declaration date - Fair value is used b/c a small dividend won't impact the market price 2. "Large" Stock Dividend: More than 20-25% of outstanding shares at date of declaration - Capitalized at par value on declaration date - Par value is used b/c a large amount of shares so the market price will probably be changed

Stock Dividends Overview

1. Distribution of a firm's stock to shareholders in proportion to their existing holdings - ex. if you owned 1K shares before a 10% stock dividend, you would own 1.1K after the dividend. 2. Percentage ownership for the shareholder is unchanged 3. Number of outstanding shares increases, and EPS decreases 4. No affect on assets or liabilities - Retained earnings is capitalized to contributed capital

Stock Dividends and Stock Splits

1. Gives a current stockholder a dividend without dispersing any assets - no liability recorded at declaration. 2. Each stockholder holds more shares after stock dividend, but the shares are worth less compared to before - So everyone owns the same proportion as before the stock dividend 3. Changes the composition of equity accounts, but NOT the total amount

Key Points to Remember

1. Stock dividends increases number of shares outstanding, but it does not decrease the par value 2. Stock splits also increases number of shares outstanding but it does decrease par value

Example: Small Stock Dividend

Notes: 1. Dividends are only declared on outstanding shares, so it's 90K shares (b/c 10K treasury shares are held) 2. Use the market price * percentage of stock dividend to calculate the debit to retained earnings (dividends) 3. Credit the common stock at par value according to number of shares issued as usual 4. The difference will be APIC (diff between market price and par price * number of shares issued in stock dividend) related to common stock

Example: Large Stock Dividend

Notes: 1. Ignore the market price with large stock dividends 2. Retained earnings is affected by the amount of shares outstanding * par value * percentage of stock dividend 3. There is no effect to APIC, only common stock since we are evaluating it at par value

Total Equity Balance Example: (Accrual)

Simply use starting equity + current year accrual basis earnings 1. Accrual basis earnings are revenue less expenses 2. Stock dividends don't affect total equity in this case (cash dividends WOULD) Note whether question is asking cash or accrual, that'll be the main difference in terms of computing the earnings for the year (revenue - expense)

Stock Split Effected in the Form of a Stock Dividend

Treated essentially the same way as issuing a stock dividend - ex. a 2 for 1 stock split would be the same as issuing a 100% stock dividend - pay attention the percentage of the stock split, since the treatment will differ depending on Small vs. Large stock dividend However, the main difference is that APIC (common stock) is debited instead of retained earnings in a stock split effected in the form of a stock dividend.

Example: Stock Split Effected in the Form of a Stock Dividend

Treated the same as a large stock dividend except: - the debit is to APIC (common stock) rather than Retained Earnings