Stock Splits, Stock Dividends and Treasury Stock: in Depth

1
24
Stock splits,
stock dividends and
Treasury stock
In depth:
Corporate finance
managers want to
maximize the
availability and
minimize the cost of
equity capital
Learning Objectives
1.
Explain stock splits
2. Account for stock dividends

3. Account for Treasury stock transactions
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
4. Analysis: Compute and explain basic

earnings per share and price earnings
ratio
Expenses
Equity
Profit
Debit
Credit
or
Loss
CourseCollege.com
Objective 24.1: Explain stock splits

Stock splits are the process of replacing each
single share of outstanding stock with multiple new
shares of stock. For example a 2 for 1 stock split
would result in every single share of old stock
being replaced with 2 shares of new stock.
1 Old Share
1 New
Share
1 New
Share
The corporation calls in all

outstanding old shares and issues
new ones.
O24.1
CourseCollege.com
Why Stock splits?

When stock is split, the market must re-price the new
shares.
Management hopes that in the re-pricing process, the
market will increase the total market value for the stock.
Example: With a 2 for 1 split, the hope is that the new price
will be greater than half of the previous price
This would benefit existing stockholders, their holdings

would be worth more.
It also helps the corporation. Investors are paying more for
the same projected returns than they were prior to the stock
split.
O24.1
CourseCollege.com
Stock splits: No journal entry notation only

Before Stock Split
After Stock Split
EQU I TY
EQU I TY
Co mmo n St o ck at Par
200,000
(20,000 shares @ $10 par value)
200,000
(40,000 shares @ $5 par value)
Co nt ribut ed Capit al
in Ex cess o f Par
130,000
in Ex cess o f Par
130,000
Ret ained Earnings

To t al Equit y
245,000
575,000
Ret ained Earnings

To t al Equit y
245,000
575,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
NO CHANGE IN THE
DOLLAR AMOUNTS
IN ANY OF THE
EQUITY ACCOUNTS
Expenses
Equity
Profit
Debit
O24.1
Credit
or
Loss
CourseCollege.com
Objective 24.2: Account for stock

dividends
Cash Dividends
More shares of
stock
$
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Stock dividends
result in no change
in total equity
Expenses
Equity
O24.1
Debit
Stock Dividends
Profit
Credit
or
Loss
CourseCollege.com
Stock dividends
Autofil Corporation
STOCKH OLDER EQUITY

Common Stock at Par
(100,000 shares @
$5 par value)
Contributed Capital
in Excess of Par
Retained Earnings
Total Equity
O24.2
To here
500,000
Stock
dividends
move dollars
from here
250,000
1,000,000
1,750,000
CourseCollege.com
Stock dividends
Autofil Corporation
STOCKH OLDER EQUITY

Common Stock at Par
(100,000 shares @
$5 par value)
Contributed Capital
in Excess of Par
Retained Earnings
Total Equity
O24.2
500,000
No change in
total Equity
250,000
1,000,000
1,750,000
CourseCollege.com
Declaration of stock dividend

We declare a
10% stock
dividend
Board of Directors
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
I have 5,000
shares Ill
get 500 more!
Profit
Debit
Credit
or
Loss
O24.2
No change
in total
Equity
Stockholder
CourseCollege.com
Stockholders receive more shares

I still own the
same % of
the
corporation
I get 500
more shares
but. . .
500 more
shares of
stock
O24.2
Before dividend
Shares outstanding = 100,000.
Penny owned 5,000 or
5,000/100,000 = 5%.
Stockholder
After dividend
Shares outstanding 100,000 x
1.1 = 110,000. Penny owns
5,000 x 1.1 = 5,500 shares or
5,500/110,000 = 5%
CourseCollege.com
10
This size (%) of the stock dividend is important!

*20 -25% or less
*20 -25% or more
Small Stock Dividend

Debit retained earnings for fair or
market value of the stock (#shares in
dividend times the market value of
each share) on the date of the
dividend declaration
Credit
Common Stock Dividend

Distributable for the par value times
the number of new shares issued in
the dividend
Large Stock Dividend

Debit
retained earnings for the par

value per share times the number of
new shares issued in the dividend on
the date of the dividend declaration
Credit
Common Stock Dividend

Distributable for the par value per
share times the number of new shares
issued in the dividend
Credit
Contributed Capital in Excess

of Par an amount necessary to
balance the journal entry
O24.2
* Assume 20%
CourseCollege.com
11
Stock dividends
Autofil Corporation
STOCKH OLDER EQUITY

Common Stock at Par
(100,000 shares @
$5 par value)
Contributed Capital
in Excess of Par
Retained Earnings
Total Equity
O24.2
500,000
Both large and

small stock
dividends
move amounts
from Retained
Earnings to
Contributed
Capital
accounts
250,000
1,000,000
1,750,000
CourseCollege.com
12
This size (%) of the stock dividend is important!

*20 -25% or less
*20 -25% or more
Small stock
dividend moves
the market value
out of retained
earnings
Large stock
dividend moves
par value out of
retained earnings
O24.2
* Assume 20%
CourseCollege.com
13
Recording small stock dividend- date of declaration

Billiards Corporation declares a 15% stock dividend.
There are 300,000 shares outstanding $5 par value.
The market price per share is $12 on the same date.
GENERAL JOURNAL
Date
Description
12/31/11 Retained Earnings

Stock Dividends Distributable
Page 56
Debit
PR
3500
Credit
540,000
3110
225,000

of Par, Common Stock
315,000
3115
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.2
Debit
Credit
or
Loss
CourseCollege.com
14

GENERAL JOURNAL
Date
Description

Page 56
PR
3500
3110

Debit
Credit
540,000
225,000
315,000
3115
300,000 x .15 x $12 market price

300,000 x .15 x $5 par value
540,000 225,000
O24.2
CourseCollege.com
15

GENERAL JOURNAL
Date
Description

Page 56
PR
3500
Debit
Credit
540,000
3110
225,000

315,000
3115
This is a temporary holding account in the Equity

section. When the stock shares are actually
distributed, this amount will be moved to Common
Stock at Par as shown on the following slides
O24.2
CourseCollege.com
16
Recording small stock dividend- date of record

Date of record 2/15/12; date of distribution 3/1/12
GENERAL JOURNAL
Date
Description
Page 56
PR
Debit
Credit
2/15/12
O24.2
CourseCollege.com
17
Recording small stock dividend- date of distribution

GENERAL JOURNAL
Date
Description
3/1/12 Stock Dividends Distributable

Common Stock, $5 par
On the date of distribution the par

value of the stock dividend is formally
moved to the Common Stock account.
Page 56
Debit
PR
3110
Credit
225,000
3005
225,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
O24.2
Profit
Debit
Credit
or
CourseCollege.com
Loss
18
Recording large stock dividend- date of declaration
Bowling Corporation declares a 30% stock dividend.

GENERAL JOURNAL
Date
Description

Page 56
Debit
PR
3500
Credit
1,500,000
3110
1,500,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.2
Debit
Credit
or
Loss
CourseCollege.com
19
Recording large stock dividend- date of declaration

GENERAL JOURNAL
Date
Description

Page 56
PR
3500
3110
Debit
Credit
1,500,000
1,500,000
500,000 x .3 x $10 par value
O24.2
CourseCollege.com
20
Recording large stock dividend- date of record

GENERAL JOURNAL
Date
Description
Page 56
PR
Debit
Credit
2/15/12
O24.2
CourseCollege.com
21
Recording large stock dividend- date of distribution

GENERAL JOURNAL
Date
Description
3/1/12 Stock Dividends Distributable

Common Stock, $10 par
On the date of distribution the par

value of the stock dividend is formally
moved to the Common Stock account.
Page 56
Debit
PR
3110
Credit
1,500,000
3005
1,500,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
O24.2
Profit
Debit
Credit
or
CourseCollege.com
Loss
22
Why stock dividends?

For the same reasons stock splits are used:
When stock dividends are distributed, the market
must re-price the new shares.
Management hopes that in the re-pricing process,
the market will increase the total market value for
the stock.
The following slide demonstrates three scenarios. .
.
O24.2
CourseCollege.com
23
New market price immediately after stock

dividend
Tot a l
Sha res
Ma rk et Price
Ma rk et
Out st a nding
per sha re
va lue
400,000
16.00 $ 6,400,000
BEFORE STOCK DIVIDEND

Sto ck di vi dend
AFTER STOCK DIVIDEND
10%
440,000
If new market pri ce i s greater than
14.55
then sto ckho l ders gai n val ue, i f l ess, they l o se val ue.
1
2
3
Exa mples of result ing ma rk et price per sha re

No Change i n val ue
440,000 $
14.55 $ 6,400,000
Sto ckho l ders gai n
440,000 $
16.00 $ 7,040,000
Sto ckho l ders l o se
440,000 $
14.00 $ 6,160,000
O24.2
CourseCollege.com
24
New market price immediately after stock

dividend
BEFORE STOCK DIVIDEND
Tot a l
Sha res
Ma rk et Price
Ma rk et
Out st a nding
per sha re
va lue
400,000
16.00 $ 6,400,000
Management hopes for this to result

Stothen
ck di vinew
dendstockholders
1 0will
% pay the
issuing firm more for each new share
AFTER STOCK DIVIDEND
440,000
If new market pri ce i s greater than
14.55
then sto ckho l ders gai n val ue, i f l ess, they l o se val ue.
Exa mples of result ing ma rk et price per sha re
No Change i n val ue
440,000 $
14.55 $ 6,400,000
Sto ckho l ders gai n
440,000 $
16.00 $ 7,040,000
Sto ckho l ders l o se
440,000 $
14.00 $ 6,160,000
O24.2
CourseCollege.com
25
Objective 24.3: Account for Treasury

stock transactions
Treasury stock is a
CONTRA
EQUITY
BALANCE SHEET
Account
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
Debit
O24.3
Credit
or
Loss
CourseCollege.com
26
Treasury stock
BALANCE SH EET
Asse t s
Cash
Acco unt s Receivab le
Invent o ry
Pro p ert y, Plant & Eq uip ment
Invest ment s
Liabilit ie s
Acco unt s Payab le
Lo ng Term Deb t
Equit y
Co nt rib ut ed Cap it al
in Excess o f Par
Ret ained Earning s
Treasury St o ck
INCOM E STATEM ENT

Re ve nue
Sales
Expe nse s
Co st o f Go o d s So ld
Sellling Exp enses
General & Ad min. Exp enses
Treasury
Stock
REDUCES
Stockholders
Equity
Pro fit
D e bit
Cre dit
Contributed Capital and

Retained Earnings
O24.3
or
300,000
Treasury Stock
(40,000)
Net Stockholder Equity
260,000
Lo ss
CourseCollege.com
27
Treasury stock
Contributed Capital and
Retained Earnings
Treasury Stock
Authorized Shares
300,000
(40,000)
Treasury stock
purchases result
in fewer
outstanding
shares than
issued shares
Issued Shares
Outstanding
Shares
O24.3
CourseCollege.com
28
Treasury stock purchase

Marine Corporation repurchases 2,000 shares
of their common stock for $58 per share.
GENERAL JOURNAL
Date
Description
5/17/12 Treasury Stock

Cash
Page 17
PR
Debit
3800
Credit
116,000
1000
116,000
Purchase 2,000 shares treasury stock
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.3
Debit
Credit
or
Loss
CourseCollege.com
29
Resulting change to equity

Marine Corporation
BEFORE Treasury Stock Purchase
Marine Corporation
AFTER Treasury Stock Purchase
STOCKH OLDER EQUITY
STOCKH OLDER EQUITY
2,250,000
2,250,000
(2 5 0 ,0 0 0 shares @ $ 5 p ar )
(2 5 0 ,0 0 0 shares @ $ 5 p ar 5 ,0 0 0 in t reasury)
Co nt ribut ed Capit al in Ex cess
o f Par, Co mmo n St o ck
Ret ained Earnings
To t al Equit y
11,250,000
3,200,000
16,700,000
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
3,200,000
(116,000)
16,584,000
The Treasury Stock purchase

reduces Cash and REDUCES
TOTAL STOCKHOLDER EQUITY
O24.3
CourseCollege.com
30
Treasury stock sale

Marine Corporation sells 1,000 shares
of their Treasury stock for $58 per share
(same as purchase price)
GENERAL JOURNAL
Date
Description
6/30/12 Cash
Treasury Stock
Page 19
PR
Debit
1000
Credit
58,000
3800
58,000
Sale of 1 ,000 shares treasury stock @ $58
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.3
Debit
Credit
or
Loss
CourseCollege.com
31

Marine Corporation
BEFORE Treasury Stock Sale
STOCKH OLDER EQUITY
Marine Corporation
AFTER Treasury Stock Sale
STOCKH OLDER EQUITY
2,250,000
2,250,000
(2 5 0 ,0 0 0 shares @ $ 5 p ar )
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
3,200,000
(116,000)
16,584,000
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
3,200,000
(58,000)
16,642,000
The Treasury Stock sale increases

Cash and INCREASES TOTAL
STOCKHOLDER EQUITY
O24.3
CourseCollege.com
32
Treasury stock sale

Marine Corporation sells 500 shares
(purchase price was $58)
GENERAL JOURNAL
Date
Description
8/30/12 Cash
Page 19
PR
Debit
1000
Credit
37,000
Contributed Capital, Treasury Stock
3700
8,000
Treasury Stock
3800
29,000
Sale of 500 shares treasury stock @ $7 4
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.3
Debit
Credit
or
Loss
CourseCollege.com
33
Treasury stock sale

GENERAL JOURNAL
Date
Description
8/30/12 Cash
Page 19
PR
1000
Debit
Credit
37,000
3700
8,000
Treasury Stock
3800
29,000
This is a normal credit balance Equity account. It

represents the excess over cost received for the
resale of Treasury stock held by the firm.
O24.3
CourseCollege.com
34
Treasury stock sale

GENERAL JOURNAL
Date
Description
8/30/12 Cash
Page 19
PR
1000
Debit
Credit
37,000
3700
8,000
Treasury Stock
3800
29,000
$74 x 500 shares

Amount needed to
balance
O24.3
500 shares x $58

cost
CourseCollege.com
35

Marine Corporation
STOCKH OLDER EQUITY
STOCKH OLDER EQUITY

Marine Corporation
2,250,000
2,250,000
(2 5 0 ,0 0 0 shares @ $ 5 p ar )
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
3,200,000
(58,000)
16,642,000
Treasury St o ck
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
8,000
3,200,000
(29,000)
16,679,000
The sale of Treasury Stock above

cost requires the use of a
Contributed Capital, Treasury stock
account
O24.3
CourseCollege.com
36
Treasury stock sale

Marine Corporation sells remaining 500 shares
GENERAL JOURNAL
Date
Description
11/30/12 Cash
Page 19
PR
Debit
Credit
1000
16,000
3700
8,000
Retained Earnings
3900
5,000
Treasury Stock
3800
29,000
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O24.3
Debit
Credit
or
Loss
CourseCollege.com
37
Treasury stock sale

GENERAL JOURNAL
Date
Description
11/30/12 Cash
Page 19
PR
Debit
1000
16,000
3700
8,000
Retained Earnings
3900
5,000
Treasury Stock
3800
Credit
29,000
All available credit balances in the Contributed

Capital, Treasury Stock account are used (debited)
first. If additional debits are necessary to balance
the journal entry, the Retained Earnings account is
used.
O24.3
CourseCollege.com
38
Treasury stock sale

GENERAL JOURNAL
Date
Description
11/30/12 Cash
Page 19
PR
Debit
1000
16,000
3700
8,000
Retained Earnings
3900
5,000
Treasury Stock
3800
Credit
29,000
$32 x 500 shares

Available credit balance of 8,000
O24.3
500 shares x $58

cost
Amount needed to
balance
CourseCollege.com
39

Marine Corporation
STOCKH OLDER EQUITY
STOCKH OLDER EQUITY

2,250,000
2,250,000
Treasury St o ck
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
8,000
3,200,000
(29,000)
16,679,000
The Treasury Stock and the

Contributed Capital, Treasury stock
accounts are zero. Retained Earnings
is reduced by $5,000
O24.3
Marine Corporation
Treasury St o ck
Ret ained Earnings
Treasury St o ck
To t al Equit y
11,250,000
0
3,195,000
0
16,695,000
and total
Equity went up
by $16,000!
CourseCollege.com
40
Objective 24.4: Analysis: Compute and

explain basic earnings per share and price
earnings ratio
Investors are especially interested in
these earnings ratios which allow market
comparisons of stock investments
P/E ratio
compares
earnings for
each share to
the market
price for each
share
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
Debit
Credit
or
Loss
O24.4
CourseCollege.com
41
Basic earnings per share

Earnings available to common stockholders =
net income minus preferred dividends
Basic
Earnings
per
share
Earnings available to
common stockholders
Average # common shares
outstanding
This calculation can only be

compared to the prior periods
in the same firm. The following
P/E ratio allows comparison to
other firms stock.
O24.4
CourseCollege.com
42
Price Earnings Ratio

Price = the market price per share
Earnings = the basic earnings per share
PE ratio
Market price per share

Basic earnings per share
The higher the ratio, the more

investors are paying for the
annual earnings per share
reported by the firm
O24.4
CourseCollege.com
43
Example
Balance Sheet -Allway Corporat ion

As of 12/ 31 2011
Asset s
Cash
Acco unt s receivab le
Invent o ry
Pro p ert y, Plant , Eq uip .
2011
1 1 2 ,4 0 0
4 3 7 ,6 0 0
8 6 6 ,9 0 0
2 ,8 3 6 ,7 0 0
To t al asset s
4 ,2 5 3 ,6 0 0
Income St at ement
For t he year ended 12/ 31/ 11
Sales
Co st o f Go o d s So ld
Wag es exp ense
Sellling exp enses
Ad minist rat ive exp .
Miscellaneo us exp .
Net Pro fit
O24.4
3 ,4 5 7 ,6 0 0
2 ,2 4 7 ,4 4 0
3 4 5 ,3 0 0
1 2 3 ,5 0 0
1 9 6 ,5 0 0
1 0 9 ,6 3 0
Liab ilit ies

To t al liab ilit ies
Eq uit y
Co mmo n St o ck -No p ar
Preferred St o ck -No p ar
Ret ained Earning s
To t al liab . + eq uit y
2011
9 2 5 ,6 0 0
1 ,9 0 0 ,0 0 0
8 0 ,0 0 0
1 ,3 4 8 ,0 0 0
4 ,2 5 3 ,6 0 0
Preferred d ivid end
6 ,4 0 0
Market p rice co mmo n
Earning s availab le t o
co mmo n st o ckho ld ers
$ 4 2 8 ,8 3 0
1 5 p er share
Avg . Co mmo n Shares Out st and ing

2 0 0 ,0 0 0
$
2 .1 4
Basic Earnings pe r Share
(Earning s avail t o co mmo n/ shares o ut st and ing )
7 .0 x
Price Earnings rat io
(Market p rice/ EPS)
4 3 5 ,2 3 0
Investors are paying 7

times the annual earnings
per share for 1 share of
Allway common stock
CourseCollege.com
44
End Unit 15
CourseCollege.com

Stock Splits, Stock Dividends and Treasury Stock: in Depth

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Stock Splits, Stock Dividends and Treasury Stock: in Depth

Caricato da

Copyright:

Formati disponibili

1

Explain stock splits

2. Account for stock dividends

4. Analysis: Compute and explain basic

Objective 24.1: Explain stock splits

The corporation calls in all

Why Stock splits?

This would benefit existing stockholders, their holdings

Stock splits: No journal entry notation only

After Stock Split

Ret ained Earnings

Ret ained Earnings

Objective 24.2: Account for stock

STOCKH OLDER EQUITY

STOCKH OLDER EQUITY

Declaration of stock dividend

Stockholders receive more shares

This size (%) of the stock dividend is important!

*20 -25% or more

Small Stock Dividend

Common Stock Dividend

Large Stock Dividend

retained earnings for the par

Common Stock Dividend

Contributed Capital in Excess

STOCKH OLDER EQUITY

Both large and

This size (%) of the stock dividend is important!

*20 -25% or more

Recording small stock dividend- date of declaration

12/31/11 Retained Earnings

Contributed Capital in Excess

Recording small stock dividend- date of declaration

12/31/11 Retained Earnings

Contributed Capital in Excess

300,000 x .15 x $12 market price

Recording small stock dividend- date of declaration

12/31/11 Retained Earnings

Contributed Capital in Excess

This is a temporary holding account in the Equity

Recording small stock dividend- date of record

Recording small stock dividend- date of distribution

Billiards Corporation declares a 15% stock dividend.

3/1/12 Stock Dividends Distributable

On the date of distribution the par

Recording large stock dividend- date of declaration

Bowling Corporation declares a 30% stock dividend.

12/31/11 Retained Earnings

Recording large stock dividend- date of declaration

Bowling Corporation declares a 30% stock dividend.

12/31/11 Retained Earnings

500,000 x .3 x $10 par value

Recording large stock dividend- date of record

Recording large stock dividend- date of distribution

3/1/12 Stock Dividends Distributable

On the date of distribution the par

Why stock dividends?

New market price immediately after stock

BEFORE STOCK DIVIDEND

If new market pri ce i s greater than

Exa mples of result ing ma rk et price per sha re

New market price immediately after stock

BEFORE STOCK DIVIDEND