The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding. Instructions Prepare the necessary journal entries assuming the following. (a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
(c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Answer and Explanation:

a. The journal entry is not required for the stock split. But the  memorandum is needed that represents the par value changed and the number of shares is also increased

Before stock split

5,000,000 shares at $10 par value

After stock split

10,000,000 shares at $5 par value

b. The journal entries are shown below:

1. Retained earnings Dr $50,000,000

        To Common stock dividend distributable $50,000,000

(Being the stock dividend declared)

For recording this we debited the retained earning as it decreased it and credited the common stock dividend distributable

2. Common stock dividend distributable $50,000,000

             To common stock $50,000,000

(Being the stock dividend distribution is recorded)

For recording this we debited the common stock dividend distributable and credited the common stock as it increased the stockholder equity

c. The stock dividend and splits contain the same function

As we know that

Stock split increased the outstanding number of shares and at the same time it decreased the par value of the share

While on the other hand stock dividend increased the outstanding number of shares and at the same time it does not have any impact on the par value of the share

Moreover, it also increased the marketability of the stock

In case when the stock dividend issued in excess of 20 to 25% of outstanding shares so we do not called stock dividend but it effected as a split up as in the form of a dividend

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