Question

Pryor Corporation issued a 2-for-1 common stock split. The shares had been originally issued at $10 per share. At what amount should retained earnings be capitalized for the additional shares issued?

Select one:
a.$10.
b.The average issue price of the shares.
c.There should be no capitalization of retained earnings.
d.Market value on the declaration date.
e.Market value on the payment date.

Answer 1

In a 2-for-1 stock split, the amount of retained earnings should not be capitalized for the additional shares issued. This transaction is only a change in the number of shares outstanding and the par value per share, not an event that impacts retained earnings.

Step-by-step explanation:

When Pryor Corporation issued a 2-for-1 common stock split, the additional shares distributed to shareholders do not affect the accounting for retained earnings. In a stock split, the company increases the number of shares and decreases the par value per share correspondingly, but this is purely a bookkeeping entry that does not involve capitalization of retained earnings. Therefore, the correct answer is c. There should be no capitalization of retained earnings.

When a company issues a stock split, the purpose is to increase the number of shares outstanding while decreasing the stock price per share. In this case, a 2-for-1 stock split means that for every one share owned, the shareholder will receive an additional share. The retained earnings is not capitalized for the additional shares issued. Therefore, the correct answer is c. There should be no capitalization of retained earnings.