Entity A is authorized to issue 30 million common shares and has no treasury stock. The stockholders’ equity section of its balance sheet consists of common stock ($5 par) $5,000,000 and retained earnings $24,000,000. On September 15, 2018, Entity A’s board of directors approved a two-for-one stock split to be effected in the form of a 100% stock dividend. The shares are to be distributed on October 10, 2018, to shareholders of record on October 1, 2018.
A. Prepare any necessary journal entry to record the stock split when it occurs. Show any calculations.
B. Prepare two partial balance sheets (stockholders’ equity) including the number of authorized, issued, and outstanding shares, one before (9/14) and one after (10/11) the 100% stock dividend.
Entity A
Partial Balance Sheet
At September 14, 2018
Entity A
Partial Balance Sheet
At October 11, 2018
C. What is the likely reason for declaring a two-for-one stock split effected as dividend payable in shares of stock?
D. Suppose that Entity A’s stock price was $22 per share before the split, what would you expect it to be after the split, all other things being equal?
E. Explain why a company might issue a stock dividend. Are stock dividends taxable to the recipient? Do they consume cash? Do they increase or decrease total stockholders’ equity? Answer all four questions.
