Question
In: Accounting
The common stock of COB, Inc. is currently selling at $80 per share. The directors wish to reduce the share price and increase the share volume prior to a new issue.
Section G--Stock Split and Stock Dividend
The common stock of COB, Inc. is currently selling at $80 per share. The directors wish to reduce the share price and increase the share volume prior to a new issue. The per share par value is $10.500,000 shares are issued and outstanding.
Prepare the necessary journal entries assuming the following.
1. The board votes a 2 for 1 stock split.
2. The board votes a 100% stock dividend.
3. After the above actions, what is the anticipated selling price of COB common stock.
Solutions
Expert Solution
1)
No Journal entry required for stock split .It requires only book adjustment where number of shares is increased to 500000*2/1 = 1000000 shares and thereby reducing par value to 10*1/2 =$ 5per share
2)
| Account title | Debit | credit |
| Stock dividend /Retained earning | 5000000 | |
| Common stock (500000*10) | 5000000 |
Number of shares issued as stock dividend= 500000*100% = 500000
In case of large stock dividend (more than 25% ),Amount of stock dividend is equals to par value of shares issued.
3)
| Market price per share | ||
| Stock Split | Market value per share is reduced by stock split | 80 *1/2 =$ 40 per share |
| Stock dividend | Market capitalization /number of shares outstanding after stock dividend | 40000000/1000000 =$ 40 per share |
Working"
Market capitalization before stock dividend= 500000*80= 40000000
Number of shares outstanding after stock dividend = 500000+500000= 1000000
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