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14 -- Stock Splits and Stock Dividends - YouTube
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I'm Larry Walther this is principles of
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accounting dot-com chapter 14 in this
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module
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Flitz in stock dividends let's begin by
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looking at stock splits stock splits
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occur when a company issues additional
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shares of stock to existing shareholders
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for example maybe there's a two-for-one
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stock split so the company doubles the
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number of shares outstanding and issues
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the additional shares to the current
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owners of the shares
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this will cause a corresponding decrease
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in par value so that a two-for-one split
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will result in a halving of the par
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value 3 for one stock split would result
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in the par value being reduced to 1/3 of
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what the par value was before the shares
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importantly each shareholder maintains
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their proportional ownership interest if
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you own 100 shares of a company that
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does a three for one split after the
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split you'll own 300 shares all of the
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shareholders will own three times as
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many shares there's no effective change
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in that the percentage ownership in the
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company you simply have more shares
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representing your ownership the total
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par value is unaffected by this
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transaction if we're increasing the
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shares and proportionately decreasing
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the par per share the product of
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multiplying the number of shares times
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the par value gives you this so it's not
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the same total par value for the entity
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perhaps an illustration will help prove
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the point here before a split we have
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common stock $1 and we have 400,000
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shares issued and outstanding now this
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gives us total par value for all the
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shares $1 times 400,000 or $400,000 is
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the total par value for the common stock
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of this entity
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after the split notice now we've got 1
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million 600 thousand shares that's four
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times as many
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but the par value is only 25 cents per
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share a significant reduction here 1/4
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what it was before hand now 1 million
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six hundred thousand shares times 25
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cents per share still gives us four
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hundred thousand dollars of total par
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value for the entity what is the
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rationale behind a stock split well a
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stock split will decrease the market
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value per share of the stock in other
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words if there's four times as many
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shares outstanding for the entity you
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would expect each share to be worth 1/4
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as much or approximately 1/4 as much
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current holders will not be disappointed
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in this price decrease however because
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they have more shares that can cause the
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stock to become more attractive to
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potential future investors they may feel
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like they're able to buy stock at a
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lower price point per share so the
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shares may become more marketable stock
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splits are oftentimes used when a stock
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price is rising and rising and rising
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and it's seen as being at such a high
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price point per share that it becomes
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unattractive to a certain group of
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investors or potential investors stock
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splits can come in odd proportions you
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can have a three four to a five four
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four even a one thousand four one
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there's nothing that says it has to be 2
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for 1 or 3 for 1 or some simple round
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number reverse splits are also possible
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for example a 1 4 5 split is possible or
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a 1 4 6 or a 1/4 10 this will decrease
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the number of shares outstanding and it
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should increase the price per share
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after a stock split the price per share
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should go up in the marketplace reverse
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splits are sometimes not looked upon
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with favor by stockholders who somehow
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feel like something's been taken away
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from them however they still on the same
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proportion of the company after the
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split and a company that has found its
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stock trading below $1 per share for
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example for a long period of time
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certain stock exchanges require minimum
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price point 4 share the reverse split is
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simply a way for the price per share to
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be increase to maintain a listing
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requirement now very similar to stock
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splits or stock dividends this is the
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issuance of additional shares to
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existing shareholders again on a
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proportional basis it's similar to stock
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splits for example a shareholder who
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owns 100 shares of stock will own 125
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shares after a 25 percent stock dividend
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so in that respect they're very similar
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it's essentially therefore the same as a
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5 for 4 stock split there is a big
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difference however that primarily
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affects the accountants a stock dividend
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requires a journal entry the par value
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per share is not changed for a
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transaction that is affected as a stock
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dividend so we need to move amounts from
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retained earnings to paid in capital to
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reflect an amount that we calculate
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related to stock dividend the amount
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that we're going to move from retained
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earnings to capital stock
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depends on the size of the distribution
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small stock dividends generally those
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that are less than 20 to 25 percent are
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deemed to not materially affect the
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market price per share and whether it's
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valid logic or not we therefore based
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the accounting up on the fair value of
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the shares involved in the stock
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dividend whereas a large stock dividend
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generally greater than 20 to 25 percent
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is deemed to materially affect the price
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per share on the Lord's as a
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proportionate decrease in the price per
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share therefore we use par value to
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record the accounting for a large stock
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dividend this is very arbitrary based on
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specific accounting rules let's look at
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an example childers corporation had 1
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million shares of $1 par value stock
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outstanding the market price was $20 per
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share and on that date they declared an
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issue to stock dividend if this was a
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small stock dividend that is 100,000
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shares 10% of a million 100,000 shares
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are issued and we would capitalize or
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record retained earnings a debit to
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retained earnings at 2 million dollars
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that's the fair market value of 100,000
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shares I'll assume the market price is
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$20 a share notice the credits their
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credit common stock for the par of the
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shares being issued that's $1 times
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100,000 and the other 1 million nine
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hundred goes to paid in capital on the
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other hand if this was a large stock
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dividend the same facts except I'm going
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to assume that shelters is now going to
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issue a 40% stock dividend that's a
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large stock dividend and the accounting
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rules would dictate that it'd be based
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on the par value of the shares the
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calculations here a million shares
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outstanding times 40% is 400,000
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additional shares are issued and those
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traders have a par value of $1 per share
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so we will debit retained earnings and
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credit common stock for the par of the
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shares so I would like to close with
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just a quick summary here a stock split
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results in additional shares being
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issued to existing shareholders the
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accounting however there's no journal
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entry needed because when there's a
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stock split the par value per share is
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reduced and the number of shares
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outstanding or increased the product of
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those two should be the same total par
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value a small stock dividend is to be
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accounted for by
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that fair value that is we are going to
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move from retained earnings to paid in
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capital the fair value of the shares
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issued and a stock a small stock
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dividend a large stock dividend is
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essentially the same accounting except
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it's based upon the par value of the
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shares in substance are very little
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difference between these transactions
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but there is a significant difference in
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terms of what the accountant needs to do
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to account for a stock split a small
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stock dividend and a large stock
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dividend
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