The payment of a stock dividend is accounted for by reducing retained earnings by a portion of the stock dividend’s value and increasing common stock (or common stock and additional paid-in capital), whereas no journal entries at all are made for a stock split. Thus neither a stock dividend nor a stock split will decrease shareholders' equity.
Basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Earnings per share will be the same whether Underhall offers a 2-for-1 common stock split or a 100% stock dividend on its common stock, because the weighted average number of common shares outstanding used for the EPS calculation will be the same.
In a stock split, the par value of the stock is reduced in the same ratio as the stock split. For example, if the stock is split 2 for 1, after the split twice as many shares will be outstanding and the par value of each share will be 1/2 what it was before the split. (From an accounting standpoint, no entry is recorded for a stock split. A memorandum note, however, is made to indicate that the par value of the shares has changed and the number of shares has increased.)
In order to answer this question correctly, it is necessary to know the difference between the way a stock split and a stock dividend are accounted for. The payment of a stock dividend is accounted for by reducing retained earnings by a portion of the stock dividend’s value and increasing common stock (or common stock and additional paid-in capital), whereas no journal entries at all are made for a stock split. Thus, a stock dividend would reduce retained earnings – though it would not reduce not total equity – while a stock split would not. Cash dividends are also accounted for by reducing retained earnings. A cash dividend cannot be paid if there is an insufficient balance in the retained earnings account. Therefore, payment of a stock dividend could limit the company’s ability to pay future cash dividends, whereas a stock split would not.
|
