14 3: Stock Dividends and Splits Business LibreTexts

In particular, the corporation must obtain a change in the par value (if any) and an increase in the number of authorized shares. Approval must be obtained not only from the state authority but also from the stockholders through a vote. A 3-for-1 stock split means that for every share an investor has, they will now have three shares. The combined value of those three shares would equal the value of what one share used to be. For example, if a stock was valued at $15 and there was a 3-for-1 split, each share would now be worth $5.

• For example, a shareholder who owns 100 shares of stock will own 125 shares after a 25% stock dividend (essentially the same result as a 5 for 4 stock split).
• In particular, the corporation must obtain a change in the par value (if any) and an increase in the number of authorized shares.
• This is because small investors may perceive the stock as more affordable and buy the stock.
• To demonstrate the process of accounting for stock splits, suppose that the Moreno Corporation’s stockholders’ equity accounts are as below.
• Depending on the circumstances, the board of directors of a corporation may wish to take steps that will change the number of outstanding shares of stock without affecting the firm’s assets or liabilities.
• In the final analysis, understand that a stock split is mostly cosmetic as it does not change the underlying economics of the firm.

Financial Accounting

Depending on the circumstances, the board of directors of a corporation may wish to take gross vs net steps that will change the number of outstanding shares of stock without affecting the firm’s assets or liabilities. When a company splits its shares, the value of the shares also splits. To continue with the example, let’s say the shares were trading at $20 at the time of the 2-for-1 split; after the split, the number of shares doubles and the shares trade at $10 instead of $20. If an investor has 100 shares at $20 for a total of $2,000, after the split he or she will have 200 shares at $10 for a total of $2,000.

Ask Any Financial Question

A stock price that is too high makes round-lot purchases impossible for some potential investors. Stock splits can be good for investors because they make a stock’s price more affordable, allowing some investors who were priced out before to buy the stock now. For current holders, it’s good to hold more shares of a company but the value doesn’t change. The strength of a company’s stock comes from its earnings, not the price of its stock.

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Thus, while a stock split increases the number of outstanding shares and proportionally lowers the share price, the company’s market capitalization remains unchanged. Although shareholders will perceive very little difference between a stock dividend and stock split, the accounting for stock dividends is unique. Stock dividends are recorded by moving amounts from retained earnings to paid-in capital. A small stock dividend (generally less than 20-25% of the existing shares outstanding) is accounted for at market price on the date of declaration. A large stock dividend (generally over the 20-25% range) is accounted for at par value. After a split, the stock price will be reduced since the number of shares outstanding has increased.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. As an alternative to debiting Retained Earnings (if allowed by state law), some firms choose to debit Additional Paid-In Capital or Capital in Excess of par. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

• Stock dividends do not affect the individual stockholder’s percentage of ownership in the corporation.
• If the event is a stock split, there is no change in either Retained Earnings or Common Stock, only a decrease in par value and an increase in the number of issued and outstanding shares.
• As a result, stock splits help make shares more affordable to small investors and provides greater marketability and liquidity in the market.
• As an alternative to debiting Retained Earnings (if allowed by state law), some firms choose to debit Additional Paid-In Capital or Capital in Excess of par.
• For example, assume that a corporation has 100,000 shares of $0.50 par value common stock before a 2-for-1 stock split.

Rapidly growing companies often have share splits to keep the per share price from reaching stratospheric levels that could deter some investors. In the final analysis, understand that a stock split is mostly cosmetic as it does not change the underlying economics of the firm. To effect the split, the stockholders approved an increase in the authorized common stock from 10,000,000 to 25,000,000 shares. All references to per-share data and https://www.bookstime.com/ stock option data have been adjusted to reflect this stock split. There are some changes that occur as a result of a split that do affect the short position, but they don’t affect the value of the short position.

• They both serve to reduce the market price per share and increase the number of shares issued and outstanding.
• Stock dividends and stock splits affect the number of common shares outstanding, which in turn influences the earnings per share (EPS) calculation.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• This price decrease is the main reason that a corporation decides to split its stock.

If the stock undergoes a 2-for-1 split before the shares are returned, it simply means that the number of shares in the market will double along with the number of shares that need to be returned. For example, in a reverse 1-for-5 split, 10 million outstanding shares at 50 cents each would now become 2 large stock dividends and stock splits are issued primarily to: million shares outstanding at $2.50 per share. Because there is no change in either the total stockholders’ equity or any of the individual components, it is not appropriate for a journal entry to be recorded at the time that a formal split is made.

The cost of my pizza is still $16 but the cost per slice is now $1 per slice ($16 cost / 16 slices). The percentage of shares issued determines whether a stock dividend is a small stock dividend or a large stock dividend. This means that when comparative statements are issued, or 5- and 10-year summaries are presented, the number of common shares on which EPS is in these statements must be retroactively adjusted for these dividends or splits.