Identifying, Analyzing, and Explaining the Effects of a stock Split On March 1 o

Question

Identifying, Analyzing, and Explaining the Effects of a stock Split

On March 1 of the current year, Zhang Company has 500,000 shares of $20 par value common stock that are issued and outstanding. Its balance sheet shows the following account balances relating to common stock.

Common stock…………………………………..$10,000,000

Paid-in capital in excess of par value……………$5,300,00

On March 2, Zhang Company splits its common stock 2-for-1 and reduces the par value to $10 per share.

a. How many shares of common stock are issued and outstanding immediately after the stock split?

b. What is the dollar balance in the common stock account immediately after the stock split?

c. What is the dollar balance in the paid-in capital in excess of par value account immediately after the stock split?

Explanation / Answer

A. Shares are not issued in Stock split.
Since it is 2-for-1 split, shares outstanding immediately after stock split = 500,000*2 = 1,000,000

B. Dollar Balance in the common stock account immediately after the stock-split = no of stock outstanding * par value of each share
= 1,000,000 * $10
= $10,000,000
Stock split does not change balance in common stock account.

C. Stock split does not affect stockholders’ equity accounting. In other words , there is no change in paid-in capital in excess of par value (Also there is no change in retained earnings, and total stockholders’ equity)

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