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Accounting for stock split and stock dividend

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13. (Stock Split and Stock Dividend) The common stock of Alexander Hamilton Inc. is currently selling at $120 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. Nine 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.

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Solution Preview

(a) No entry is required for stock split. Only a memorandum is required indicating that the number of shares has increased from 9 million to 18 million and the face value of stock has decreased from $10 to $5 per share.

(b) The stockholders will be provided ...

Solution Summary

This post explains what journal entries are to be made and how stock split is different from stock dividend for the companies with regard to their accounting treatment.

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See Also This Related BrainMass Solution

Accounting II: stock dividend, stock split, cumulative preferred, retained earnings

1. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.

2. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

3. How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position?
a.Note disclosure
b.Increase in stockholders' equity
c.Increase in current liabilities
d.Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance.

4. Gonzalez Company has 350,000 shares of $10 par value common stock outstanding. During the year, Gonzalez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Gonzalez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,242,500.
b. $525,000.
c. $192,500.
d. $175,000.

5. The stockholders' equity section of Lawton Corporation as of December 31, 2006, was as follows:

Common stock, par value $2; authorized 20,000 shares;

issued and outstanding 10,000 shares $ 20,000

Paid-in capital in excess of par 30,000

Retained earnings 75,000

$125,000

On March 1, 2007, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended February 28, 2007, Lawton sustained a net loss of $10,000.

What amount should Lawton report as retained earnings as of March 1, 2007?
a. $56,000.
b. $62,000.
c. $66,000.
d. $72,000.

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