E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is curre

Question

E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding. Instructions Prepare the necessary journal entries assuming the following. (a) The board votes a 2-for-1 stock split. (b) The board votes a 100% stock dividend. (c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding. (Kieso 882)

Explanation / Answer

(a) No entry—simply a memorandum note indicating the number of shares has increased to 18 million and par value has been reduced from $10 to $5 per share. (b) Retained Earnings ($10 X 9,000,000)................ 90,000,000 Common Stock Dividend Distributable....... 90,000,000 Common Stock Dividend Distributable............ 90,000,000 Common Stock............................................. 90,000,000 (c) Stock dividends and splits serve the same function with regard to the securities markets. Both techniques allow the board of directors to increase the quantity of shares and reduce share prices into a desired “trading range.” For accounting purposes the 20%–25% rule reasonably views large stock dividends as substantive stock splits. In this case, it is necessary to capitalize par value with a stock dividend because the number of shares is increased and the par value remains the same. Earnings are capitalized for purely procedural reasons

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