In the past year, Gosser Corporation declared a 10% stock dividend, and Jenks, I

Question

In the past year, Gosser Corporation declared a 10% stock dividend, and Jenks, Inc. announced a 2-for-1 stock split. Your parents own 100 shares of each company's $50 par value common stock. During a recent phone call, your parents ask you, as an accounting student, to explain the differences between the two events.

Instructions

Write a letter to your parents that explains the effects of the two events on them as stockholders and the effects of each event on the financial statements of each corporation.

Explanation / Answer

1) Gosser Corporation's 10% stock dividend:

'Stock dividend' is issuing additional shares to the existing shareholders out of the retained earnings of the company. A 10% stock dividend would mean that you would receive 10 shares (10% of the 100 shares that you already hold) without having to pay any money for those shares. After the stock dividend is given the no of shares that you would have will become 110 and the total par value of your holdings will become 110*50 = $5,500.

Stock dividends are given in lieu of cash dividends when the company does not want to pay cash to the shareholders but at the same time would like to keep the shareholders happy. Additional shares, though they don't bring any additional cash, give the shareholders a feeling of being rewarded for holding the shares.

After the stock dividend, the no of common stock shares increases by the total number of shares issued as dividend for all the shareholders put together. The value of the shares issued as stock dividend is deducted from the retained earnings and added to par value of common stock. However, there won't be any change in the total of equity, which is the sum total of contributed capital and earned capital.

2) Jenks, Inc. announced a 2-for-1 stock split.

A stock split is a decision by the company to increase the number of shares that are outstanding, by issuing more shares to current shareholders. In the case of Jenks, it is a 2-for-1 stock split, which means that every shareholder with one stock is given an additional share. After the stock split you will be owning 200 shares of par value $25, the total par value being $5000/-. Before the split, you have 100 shares of $50 each with an aggregate par value of $5000. Thus there is no change in total par value; only the no of shares increases with the par value of a single share halved to $25.

In the financial statements of the company the no of shares would double, with no change in values of any component of equity.

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