How to Calculate Stock Splits and Stock Dividends (5 Video Links)
Stock splits and stock dividends impact the number of common stock shares outstanding, and the increase in shares changes the weighted average shares of stock outstanding, and earnings per share.
To explain the concepts, start with a journal entry for issuing common stock:
On February 1st, Premier Manufacturing issues 20,000 shares of $5 par value common stock and receives $125,000 in cash. No other common stock shares are outstanding on Feb. 1st.
Debit Credit
Cash $125,000
Common stock ($5 par value) $100,000
Additional paid in capital $25,000
(20,000 shares X $5 par value) equals $100,000, which is posted to common stock. The amount received that is greater than $100,000 is posted to additional paid in capital ($25,000).
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Stock Dividend Example
When a stock dividend is issued, each shareholder receives additional shares of common stock. This transaction differs from a cash dividend, which is a payment of cash.
On March 1st, Premier declares a 10% stock dividend totaling 2,000 shares. The market value of 2,000 shares is $30,000 (2,000 shares X $15 per share). This is a small stock dividend, because the shares issued total less than 20-25% of the outstanding shares before the dividend is issued.
Debit Credit
Retained earnings $30,000
Common stock ($5 par value) $10,000
Additional paid in capital $20,000
On the declaration date, the par value of the stock dividend shares (2,000 shares X $5 par value, or $10,000) is posted to common stock. The amount that is greater than the $10,000 is posted to additional paid in capital ($20,000). The retained earnings balance is debited (reduced).
Note that the total common stock shares outstanding increases by 2,000 shares. If the dollar amount of earnings available to common stockholders remains the same, earnings per share will decline. Assume, for example, that earnings available to common stockholders total $160,000:
Earnings per share before stock dividend: $160,000 / 20,000 shares = $8.00 per share
Earnings per share after stock dividend: $160,000 / 22,000 shares = $7.27
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Stock Split Example
The stock split definition points out that the total number common stock shares increases, while the price per share decreases. As a result, the total equity balance does not change, due to a stock split.
On June 1st, Premier issues a 4 for 1 (4:1) stock split. There are 30,000 shares of common stock outstanding before the stock split, and the par value is $5 per share.
Premier posts a memo entry explaining the change to stockholder’s equity, and does not post a journal entry. The total common stock outstanding is (30,000 shares X 4), or 120,000 shares. The par value per share is adjusted to ($5 / 4), or $1.25 per share.
When a stock dividend or stock split occurs, the weighted average shares outstanding are adjusted. These changes impact the diluted earnings per share calculation.
Ken Boyd
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
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