The common stock of Warner Inc. is currently selling at $114 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 $8; book value is $77 per share. 5.24 million shares are issued and outstanding.
Prepare the necessary journal entries assuming the following. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
(a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
No.
Account Titles and Explanation
Debit
Credit
(a)
(b)
(To record the declaration.)
(To record the distribution.)
To prepare the necessary journal entries for the given scenarios, we need to understand the concept of a stock split and a stock dividend.
(a) A 2-for-1 stock split means that each shareholder will receive two shares for every share they currently own. This will effectively reduce the share price while increasing the share volume proportionally.
Journal Entry:
No entry is required for a stock split. A stock split does not affect the financial position of a company. It only affects the number of shares outstanding and the par value per share.
(b) A 100% stock dividend means that each shareholder will receive additional shares equal to their current holdings. This will effectively increase the share volume without changing the share price.
Journal Entry:
To record the declaration of a 100% stock dividend:
No. Account Titles and Explanation Debit Credit
Common Stock - Par Value $5.24 million * $8 $41.92 million
Additional Paid-in Capital - Stock Dividend $41.92 million
(To record the declaration of a 100% stock dividend.)
To record the distribution of the stock dividend:
No. Account Titles and Explanation Debit Credit
Additional Paid-in Capital - Stock Dividend $41.92 million Common Stock - Par Value $41.92 million
(To record the distribution of the stock dividend.)
Note: Since a stock dividend does not involve any cash outflows, the balance in the Additional Paid-in Capital - Stock Dividend account is transferred to the Common Stock - Par Value account.
Please note that the numbers used in this explanation are hypothetical and might not reflect the actual financials of Warner Inc.