Page 528 - Accounting Principles (A Business Perspective)

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accounting for large and small stock dividends, accountants must determine the relative size of the stock dividend
before making any journal entries.
To see the effect of small and large stock dividends on stockholders' equity, look at Exhibit 99.

A stock split is a distribution of 100 per cent or more of additional shares of the issuing corporation's stock
accompanied by a corresponding reduction in the par value per share. The corporation receives no assets in this
transaction. A stock split causes a large reduction in the market price per share of the outstanding stock. A two-for-
one split doubles the number of shares outstanding, a three-for-one split triples the number of shares, and so on.
The split reduces the par value per share at the same time so that the total dollar amount credited to Common Stock
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remains the same. For instance, a two-for-one split halves the par value per share. If the corporation issues 100
per cent more stock without a reduction in the par value per share, the transaction is a 100 per cent stock dividend

rather than a two-for-one stock split.
The entry to record a stock split depends on the particular circumstances. Usually, firms change only the
number of shares outstanding and the par or stated value in the records. (The number of shares authorized may
also change.) Thus, they would record a two-for-one stock split in which the par value of the shares decreases from
USD 20 to USD 10 as follows:
Common stock - $20 par value (-SE) 100,000
Common stock - $10 par value (+SE) 100,000
To record a two- for-one stock split; 5,000 shares of $20
par value common stock were replaced by 10,000 shares
of $10 par value common stock.
In Exhibit 100, we summarize the effects of stock dividends and stock splits. Stock dividends and stock splits
have no effect on the total amount of stockholders' equity. In addition, stock splits have no effect on the total
amount of paid-in capital or retained earnings. They merely increase the number of shares outstanding and
decrease the par value per share. Stock dividends increase paid-in capital and decrease retained earnings by equal
amounts.

Total Common Paid-in Retained Number of Par value
Stockholders' Stock Capital - Earnings Shares Per share
equity common outstanding
Stock
dividends:
Small No effect Increases Increases* Decreases Increases No effect
Large No effect Increases No effect Decreases Increases No effect
Stock splits No effect No effect No effect No effect Increases Decreases
Exhibit 100: Summary of effects of stock dividends and stock splits
The preceding chapter discussed how corporate laws differ regarding the legality of a dividend. State law
establishes the legal or stated capital of a corporation as that portion of the stockholders' equity that must be
maintained intact, unimpaired by dividend declarations or other distributions to stockholders. The legal capital
often equals the par or stated value of the shares issued or a minimum price per share issued.
The objective of these state corporate laws is to protect the corporation's creditors, whose claims have priority

over those of the corporation's stockholders. To illustrate the significance of the legal capital concept, assume a
corporation in severe financial difficulty is about to go out of business. If there were no legal capital restrictions on
42 If a corporation reduces the par value of its stock without issuing more shares, say, from USD 100 to USD 60 per
share, then USD 40 per share must be removed from the appropriate capital stock account and credited to Paid-
In Capital Recapitalization. Further discussion of this process, called recapitalization, is beyond the scope of this

text.

Accounting Principles: A Business Perspective 529 A Global Text