Chapter 11 Stockholders’ Equity: Capital Stock and Dividends 503Exhibit 4
Stockholders’ Equity
Section with Treasury
StockStockholders’ Equity
Paid-in capital:
Common stock, $25 par (20,000 shares
authorized and issued) $500,000
Paid-in capital in excess of par—common 150,000
Paid-in capital—treasury stock 2,000
Total paid-in capital $652,000
Retained earnings 130,000
Total $782,000
Deduct treasury stock (600 shares at cost) 27,000
Total stockholders’ equity $755,000STOCK SPLITS
Corporations sometimes reduce the par or stated value of their common stock and is-
sue a proportionate number of additional shares. When this is done, a corporation is
said to have split its stock, and the process is called a stock split.
When stock is split, the reduction in par or stated value applies to all shares, includ-
ing the unissued, issued, and treasury shares. A major objective of a stock split is to re-
duce the market price per share of the stock. This, in turn, should attract more investors
to enter the market for the stock and broaden the types and numbers of stockholders.
To illustrate a stock split, assume that Rojek Corporation has 10,000 shares of $100
par common stock outstanding with a current market price of $150 per share. The
board of directors declares a 5-for-1 stock split, which reduces the par to $20, and in-
creases the number of shares to 50,000. The amount of common stock outstanding is
$1,000,000 both before and after the stock split. Only the number of shares and the par
value per share are changed. Each Rojek Corporation shareholder owns the same total
par amount of stock before and after the stock split. For example, a stockholder who
owned four shares of $100 par stock before the split (total par of $400) would own 20
shares of $20 par stock after the split (total par of $400).
Since there are more shares outstanding after the stock split, we would expect the
market price of the stock to fall. In the preceding example, there would be five times
as many shares outstanding after the split. Thus, we would expect the market price of
the stock to fall from $150 to approximately $30 ($150 5).
Since a stock split changes only the par or stated value and the number of shares
outstanding, it is not recorded by a journal entry. Although the accounts are not affected,
the details of stock splits are normally disclosed in the notes to the financial statements.Describe the effect of stock
splits on the financial
statements.
5
Q.LTM Corporation an-
nounced a 4-for-1 stock
split of its $50 par value
common stock, which is
currently trading for $120
per share. What is the
new par value and the
estimated market price of
the stock after the split?
A.$12.50 ($504) par
value; $30 ($1204)
estimated market price.