6 9: Stock Splits Business LibreTexts

The benefit to the shareholders comes about, in theory, because the split creates more attractive opportunities for other future investors to ultimately buy into the larger pool of lower priced shares. For recording purpose, a reverse stock split does not require a double entry accounting because it does not affect the ultimate reporting amount of any item in stockholders’ equity. Like a forward split, no double entry accounting is needed to book a reverse stock split. The change in the number of shares and their par value resulting from the execution of a reverse split is brought to record by means of just a memorandum entry. Understanding the correct journal entries for stock splits ensures that the equity section of the balance sheet accurately reflects the changes in the number of shares and par value per share. This understanding also helps in maintaining clear and transparent financial records, which are essential for stakeholders, including investors, regulators, and financial analysts.

Stockholders’ Equity Outline

Just before the split, the companyhas 60,000 shares of common stock outstanding, and its stock wasselling at $24 per share. The split causes the number of sharesoutstanding to increase by four times to 240,000 shares (4 ×60,000), and the par value to decline to one-fourth of its originalvalue, to $0.125 per share ($0.50 ÷ 4). So, why don’t we just go ahead and jump into this example right here and we’ll try this first one right now. So the growing company declared a 2 for 1 stock split on their $0.20 par value common stock when 250,000 shares were outstanding. You can imagine that 2 for 1 means that the prices are going to be cut in half and we’re going to double the amount of shares.

What is the approximate value of your cash savings and other investments?

• A stock split works much similar to a large scale stock dividend in that the distribution of additional shares under both is usually substantial enough to affect the market price of the stock.
• For example, a 2-for-1 stock split is similar to a 100% stock dividend.
• Despite the increase in the number of shares, the total market capitalization and the overall value of shareholders’ equity remain unchanged.

There are two typesof stock dividends—small stock dividends and large stock dividends.The key difference is that small dividends are recorded at marketvalue and large dividends are recorded at the stated or parvalue. Thedate of record determines which shareholders will receive thedividends. There is no journal entry recorded; the company createsa list of the stockholders that will receive dividends.

Understanding Dilution in Accounting and Its Financial Impact

A stock price that is too high makes round-lot purchases impossible for some potential investors. Receiving more of the additional shares will not result in taxable income under U.S. law. The tax basis of each share owned after the stock split will be half what it was before the split. Another disadvantage is a potential increase in the stock’s volatility. Lower-priced shares resulting from a split may attract more speculative trading, potentially leading to greater price shifts.

Understanding Stock Splits

Treasury shares are not outstanding, sono dividends are declared or distributed for these shares.Regardless of the type of dividend, the declaration always causes adecrease in the retained earnings account. Stock investors are typically driven by two factors—a desire toearn income in the form of dividends and a desire to benefit fromthe growth in the value of their investment. Members of acorporation’s board of directors understand the need to provideinvestors with a periodic return, and as a result, often declaredividends up to four times per year. However, companies can declaredividends whenever they want and are not limited in the number ofannual declarations. They are not considered expenses, and theyare not reported on the income statement.

What is Stock Split Accounting?

Thus, it takes only $6,000 rather than $24,000 to purchase 100 shares. Apple Inc. is a notable example of a company that has executed current portion of long term debt cpltd multiple stock splits. One significant stock split occurred on August 31, 2020, when Apple performed a 4-for-1 forward stock split.

The difference is the 3,000 additional shares of the stock dividend distribution. The company still has the same total value of assets, so its value does not change at the time a stock distribution occurs. The increase in the number of outstanding shares does not dilute the value of the shares held by the existing shareholders. The market value of the original shares plus the newly issued shares is the same as the market value of the original shares before the stock dividend.

These occur when a company increases the number of its outstanding shares without changing the overall market capitalization. Each shareholder receives additional shares in proportion to their prior holdings, while the value of each share decreases proportionally. Stock split accounting refers to the accounting adjustments made in a company’s financial statements and records when a stock split occurs. Remember, a stock split does not change the overall equity value of the company; it merely changes the number of shares outstanding and the par value (if any) of those shares. Since a stock dividend distributable is not to be paid with assets, it is not a liability.