Which one of the following events would not require a journal entry on a corporation’s books? a 2% stock dividend b. $1 per share cash dividend c. 100% stock dividend d. 2-for-1 stock split

For example, a 1-for-2 reverse split will exchange one new share for 2 existing shares. In other words, if you owned 1,000 shares before the split, you would only own 500 shares after the split. The total stockholders’ equity on the company’s balance sheet before and after the split remain the same. A stock split is much like a large stock dividend in that both are large enough to cause a change in the market price of the stock. Additionally, the split indicates that share value has been increasing, suggesting growth is likely to continue and result in further increase in demand and value. Arnold, a less experienced investor, owns 1,000 shares of Toronto Inc. at $0.5, the total value being $500.

Note that dividends are distributed or paid only to shares of stock that are outstanding. Treasury shares are not outstanding, so no dividends are declared or distributed for these shares. Regardless of the type of dividend, the declaration always causes a decrease in the retained earnings account.

How a Stock Split Works

When state law requires a transfer, under the circumstances of a split effected as a dividend there is no need to capitalize retained earnings, other than to the extent occasioned by legal requirements. On the date of payment, the corporation mails checks to the appropriate recipients, an event recorded as follows. With each share being worth $1,000, Cathy’s investment in ABC Company is unchanged.

Not only is the investor guaranteed the return of whatever the dividend yield is, but s/he may also earn whatever the stock appreciates to during his or her time of ownership. However, s/he is also subject to whatever the stock may decline to, as well. A stock https://turbo-tax.org/contributed/ split does not require journal entry because it does not affect any accounts. Investors might not want to invest in a company that has a low stock price. It is also used in mergers and ownership consolidations to remove excess stock from the market.

What are the journal entries for a stock split?

For example, in a 2-for-1 stock split, two shares of stock are distributed for each share held by a shareholder. From a practical perspective, shareholders return the old shares and receive two shares for each share they previously owned. The new shares have half the par value of the original shares, but now the shareholder owns twice as many. If a 5-for-1 split occurs, shareholders receive 5 new shares for each of the original shares they owned, and the new par value results in one-fifth of the original par value per share.

If the company had instead offered a $0.70 annual cash dividend per share, the owner of 100 shares would receive $70 in dividends for the year. An investor who owned 1,000 shares of the stock pre-split would have owned 4,000 shares post-split. Apple’s outstanding shares increased from 3.4 billion to approximately 13.6 billion, while the market capitalization remained largely unchanged at $2 trillion.

The Mechanics of a Stock Split

A stock dividend (also known as a scrip dividend) can be the economic equivalent of a stock split. In some instances, a company may offer its shareholders an alternative option to receiving cash dividends. The shareholder chooses to not receive dividends directly as cash; instead, the shareholder’s dividends are directly reinvested in the underlying equity. This is called a dividend reinvestment program or dividend reinvestment plan (DRIP). The net affect of reverse stock split is nothing because the company is still worth the same amount. In other words, a 1-for-2 split would decrease the number of outstanding shares in half, but it would also increase the value of each share by 100 percent.

• A reverse stock split, as the name implies, is the opposite of a forward or normal stock split.
• This can help companies repurchase their shares at a lower cost since their orders will have less of an impact on a more liquid security.
• Although shareholders will perceive very little difference between a stock dividend and stock split, the accounting for stock dividends is unique.
• The date of payment is the date that payment is issued to the shareholder for the amount of the dividend declared.

Companies that do not want to issue cash or property dividends but still want to provide some benefit to shareholders may choose between small stock dividends, large stock dividends, and stock splits. Both small and large stock dividends occur when a company distributes additional shares of stock to existing stockholders. The primary purpose of stock split is to decrease the market price of company’s share so that it becomes more accessible and affordable to potential shareholders and investors.

Dividend Dates

The financial statements and notes must be updated to reflect the new number of outstanding share, but there is not journal entry to record the split. For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares for every share owned by a shareholder. This is the date that dividend payments are prepared and sent to shareholders who owned stock on the date of record. The related journal entry is a fulfillment of the obligation established on the declaration date; it reduces the Cash Dividends Payable account (with a debit) and the Cash account (with a credit).

• Stock investors are typically driven by two factors—a desire to earn income in the form of dividends and a desire to benefit from the growth in the value of their investment.
• It only increases the

  number of shares outstanding and decreases par (or stated) value per share.

• The company then can either retire the shares, or hold them as treasury stock (non-circulating, but available for re-issuance).
• Stock dividends also provide owners with the possibility of other benefits.
• A large stock dividend occurs when a distribution of stock to existing shareholders is greater than 25% of the total outstanding shares just before the distribution.

The company still has the same total value of assets, so its value does not change at the time a stock distribution occurs. The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued shares is the same as the market value of the original shares before the stock dividend.

Why Do Companies Issue Stock Dividends?

For example, assume an investor owns 200 shares with a market value of $10 each for a total market value of $2,000. A stock split occurs when a Board of Directors authorizes a change in the par or stated value of its stock. This reduction in par value is made to lower the market price of the stock to make the stock more attractive to potential investors.