Question

(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

1. The board votes a 2-for-1 stock split.
2. The board votes a 100% stock dividend.
3. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Short answer

Total Common Stock Dividend Distribution is $90,000,000.

Step-by-step solution

Meaning of Common Stock

The term common stock refers to securities that allow individual owners to participate in a corporation and win a portion of its profits. Stock options provide individuals with the ability to elect the board of directors of a company, as well as vote on corporate policy.

Explaining when the board voted a 2-for-1 stock split

No entry should be made, simply a memorandum note indicating the number of shares has increased to 18 million,and par value has been reduced from $10 to $5 per share.

Preparing Journal Entries

S.no.	Particular	Debit $	Credit $
(b)	Retained Earnings	90,000,000
	Common Stock Dividend Distribution		90,000,000
	To record the issue of stock.
	Common Stock Dividend Distribution	90,000,000
	Common Stock		90,000,000
	To record issue of stock.

Explaining the difference between accounting and the securities market.

Stock dividends and splits serve the same function with regard to the securities markets. Both techniques allow the board of directors to increase the number of sharesand reduce share prices into a desired “trading range.”

The 20%-25% rule reasonably views large stock dividends as substantive stock splits for accounting purposes. In this case, it is necessary to capitalize par value with a stock dividend because the number of shares is increased, and the par value remains the same. Earnings are capitalized for purely procedural reasons