Accounting Principles II: Stock Splits

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A stock split occurs when a Board of Directors authorizes a change in the par or stated value of its stock. This reduction in par value is made to lower the market price of the stock to make the stock more attractive to potential investors. When a company's stock splits, the change in the par value is offset by a corresponding change in the number of shares so the total par value remains the same. The total stockholders' equity is unaffected by the stock split and no entries are recorded. For example, if Grandma's Girls declared a 3-for-1 stock split instead of a 10% stock dividend, the company would issue three shares in place of every one share currently held. After the split occurs, the par value or stated value is divided by 3 (because it is a 3-for-1 stock split) to determine the new par or stated value, and the number of outstanding shares is multiplied by 3. After the stock split, the new par value is $1 ($3 3) and the number of outstanding shares is 1,500,000 (500,000 3). The total par value of the common stock remains at $1,500,000 (1,500,000 shares $1 par value). The following chart illustrates the effects of stock dividends and stock splits on stockholders' equity. Effect of Stock Dividends and Stock Splits on Stockholders' Equity Before After Stock Dividend After Stock Split Common Stock, $3 par Additional Paid-in-Capital Retained Earnings $1,500,000 6,000,000 2,325,000 $1,650,000 6,850,000 1,325,000 $9,825,000 $1,500,000 6,000,000 2,325,000 $9,825,000

Total Stockholders' Equity $9,825,000

Shares Outstanding

500,000

550,000

1,500,000

Book Value per Share

$19.65

$17.86

$6.55