Stock Splits Accounting Help

Over time, the. market price of a corporation s Britney stoke in value so much that it becomes top expensive for many investors, When this happens.u corporation may sociopolitical Dy increasing the inhere. its shareholdings outstanding.

The presuppose Astor(split<> reduce substantially the market price’ of the common stock, with the intent of making it more affordable to investors  For example. assume that Pelican Corporation has.outstanding j million “hares of .$1() par .value cornmeal stock: The market price’· is currently $90 per share.

To make. the stock more affordability.the corporation decides to increase the number ()f ‘outstanding shares from This, action is calks  split. A stockholder who owned j 00 shares stock freebie. the split wiII own the’ split. Since the number oC outstanding Shakespearean doubled without any change in total assets or stockholders the market price of the stock should (kop immediately from $<10 to are:

In splittings stock a corporation is required to reduce the ‘par value per share’ in proportion to the size of the split. As this’ was a 2 for: slip the company must reduce the par value of the stock from $,to”$5.per.share.

Had it been a 4 or- I split{ the pat value could have been’ reduced from $10 to $2.50 share. A stock split does not change the balance of any ledger account; consequence the transaction may be recorded merely by a memorandum entry.

For Pelican Corp this memorandum might read as follows: Sept. 30 Memorandum: Issued additional I million shares of common Sloe; b a 2-  for- I stock split. Par value reduced from $10 per share to $S per share.The description of common stock also is changed in the balance sheet to reflect the lower ‘par value and the greater number of shares outstanding.

Stock may be split in any desired ratio. Among the more common ratios are 2 for I. 3 for 2. and 3 for I. The determining factor is the number of shares needed tv bring the price of the stock into the desired trading range. For example. assume that a $5 par value stock is selling at a price of $150 per share and that management -wants to red ce the price to approximately $30 per share.

This objective may be accomplished with 5{or- I stock split ($150 + 5 = $30). Par value after the 5-for-1 stock split is $1 pe. snare ($5 par value x .’Is). Treasury Stock .Corporations frequently reacquire shares of their own capital stock by in the open market. Paying out ‘:ash to reacquire shares will reduce the assets of  corporation and reduce the stockholders’ equity by the same amount.

One reason fc l s ch purchases  is to have, stock a available to.reissue to officers and employees und T S ocoption or bonus plans. Other reasons may include a desire to increase the report d e brings per share or to support the current market price of the stock. Treasury stock may defined as shares of a corporation’s own can. stock that have been issued and later reacquired by the issuing company but that ‘ a’ e not been canceled or permanently retired.

Treasury shares may be held indefinite v 0′ may be issued again at any time. Shares of capital stock held in the treasury are not and to receive dividends, to vote, or to share in assets upon dissolution of the company. In the computation of earnings per share, shares held in the treasury are not regards t as outstanding, g share.

Recorder Purchases of Treasury Stock Purchases of treasury stock are usually recorded by debiting ‘the Treasiry Steck account with the cost of the stock, For example. if Torrey Corporation reacquires! shares of its own $5 par stock delta price of $100 per share, 100,entry is as follow:

Treasury Stock 150,000 Cash 150,000 Purchased 1.500 shares of $5 par treasury stock at $100 per share. Note that the Treasury Stock account is debited for the cost of the shares p-r based, not their par value, ‘ Treasury Stock Is Not Asset When treasury stock is purchased, the core .nutrition is . eliminating. part of its stockholders’ equity, by a payment to one or more stockholder.

The purchase of treasury stock should be regarded as a reduction of stock. IIslders’ equity, not as the acquisition of an asset. For this reason, the Treasury Stock account should appear in the balance sheet as a deduction in the stockholders: equity secret Despite a lack of theoretical s report, a few corporations do classify treasury stock as a base grounds that the shares could be SOld Cor cash just as readily as shares owned in another corporation . he same argument could be made for trending unissued shares as assets. Treasury shares are basically 1[‘ am as unissued shares, and an’ issue J share of stock is definitely not an asset The presentation of treasury stock in Torrey Corporation’s balance sheet appears as follows, based on assumed numbers e~cept for treasury stock

Posted on November 21, 2015 in Stockholders' Equity: Paid-in Capital

Share the Story

Back to Top
Share This