Stock dividends have no effect on the total amount of stockholders’ equity or on net assets. They merely decrease retained earnings and increase paid-in capital by an equal amount. Immediately after the distribution of a stock dividend, each share of similar stock has a lower book value per share. This decrease occurs because more shares are outstanding with no increase in total stockholders’ equity. They both serve to reduce the market price per share and increase the number of shares issued and outstanding. Comparing Moreno’s stockholders’ equity accounts before and after the stock split, no change has occurred in either total stockholders’ equity or the individual components.

• In the final analysis, understand that a stock split is mostly cosmetic as it does not change the underlying economics of the firm.
• Since many small investors think the stock is now more affordable and buy the stock, they end up boosting demand and drive up prices.
• All references to per-share data and stock option data have been adjusted to reflect this stock split.
• Rapidly growing companies often have share splits to keep the per share price from reaching stratospheric levels that could deter some investors.
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This price decrease is the main reason that a corporation decides to split its stock. A stock split is usually done by companies that have seen their share price increase to levels that are either Online Accounting too high or are beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more affordable to small investors even though the underlying value of the company has not changed. Stock dividends are payable in additional shares of the declaring corporation’s capital stock.

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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 law firm chart of accounts $2,000. However, if this event is a stock dividend, the stock’s par or stated value will not change, but Retained Earnings will decrease and Common Stock will increase. From the investor’s viewpoint, each stockholder receives two additional shares for each share owned. In effect, the old shares are canceled and shares with the new par value are issued. The reasoning behind the approach is that it does not alter the total amount of paid-in-capital or retained earnings and thus more clearly reflects the split nature of the stock dividend.

• 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.
• If so, the company would be more profitable and the shareholders would be rewarded with a higher stock price in the future.
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• Thus, although the number of outstanding shares and the price change, the market capitalization remains constant.
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• 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.

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• The pizza has 8 slices and costs $16 per pizza which is $2 per share ($16 price / 8 slices).
• Thus, the firm accounts for the dividend at the current market value of the outstanding shares.
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• It may seem odd that rules require different treatments for stock splits, small stock dividends, and large stock dividends.
• Since a stock dividend distributable is not to be paid with assets, it is not a liability.
• Meanwhile, the splits or large dividends do not increase the company’s authorized shares nor their legal capital, as it merely divides the existing shares into multiple parts.
• After a 10% stock dividend, the stockholder still owns 1% of the outstanding shares—1,100 of the 110,000 outstanding shares.

When state law requires a transfer, under the circumstances of a split effected as a dividend there is no need to capitalize retained earnings, other than to the extent occasioned by legal requirements. As a compromise, the action can be described as a stock split effected in the form of a dividend. Some firms debit the full amount to the Retained Earnings account in order to reflect the fact that the new shares were distributed as a dividend.

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As a result, the corporation reduces the par value of its stock from $15 to $5 and increases the number of shares issued and outstanding from 50,000 to 150,000. To demonstrate the process of accounting for stock splits, suppose that the Moreno Corporation’s stockholders’ equity accounts are as below. Since the number of outstanding shares has changed but the par value per share (or its equivalent) remains the same, there must be a credit to the capital stock account equal to the par value of the newly issued shares. Small increases in the number of shares are accomplished through small stock dividends and are distributed in order to provide stockholders with a symbolic return on their investment that does not require a cash distribution. All publicly traded companies have a set number of shares that are outstanding. A stock split is a decision by a company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.