Question

What is the difference between a stock split and a stock split effected in the form of a stock dividend? Which requires journal entries? Finally, what is a reverse stock split, and why would a company have one?

Answer 1

Stock split is an events that increase the outstanding shares and reduce the stated par value. For example a 3 for 1 stock split would make the outstanding three times more than before and the par value is one third of before. Stock split doesn't have any effect on the ownership percentage holding in the company by the shareholders. This is done to avoid any hostile takeover of the company.

For example: x has 10 shares of par value of rs. 10. The company has a share sppit of two to one. The 10 shares will become 20 shares and the par value will become 5. Here the wealth is not affected because even though the par value is decreased to 5 he is getting additional 10 shares at no cost.

Stock dividend is event of issuance of additional no of shares to existing shareholders on a propotional basis. These are also called bonus shares in lieu of dividends. Stock dividend and stock split are very similar. This is mainly done when the free reserves of the company are very high and the company wants to move it to share capital.

Stock dividend require journal entry to transfer free reserves to share capital.

Reverse stock split is an event where tha reduces the outstanding no of shares and increase the stated par value. Example if x has 10 shares of rs 10 par value after reverse stock split 1 for 2 the shares will become 5 and par value to 20.

This is done because the company wants its its s value to be high. In the most of the cases the reverse stock split is done to fulfill the listing requirement. The listing requirement specifies that the share price to be of than certain amount.