Question

The market value of Yeates Corporation’s common stock had become excessively high. The stock was currently selling for $240 per share. To reduce the market price of the common stock, Yeates declared a 3-for-1 stock split for the 100,000 outstanding shares of its $10 par value common stock.

Required
a. What entry will be made on the books of Yeates Corporation for the stock split?
b. Determine the number of common shares outstanding and the par value after the split.
c. Explain how the market value of the stock will be affected by the stock split.

Answer 1

a.

The typical journal entry with debit and credit is not needed for Stock split, only memo entry will be passed to note that the numbers of outstanding share has changed and the par value of the stock is changed with stock split ratio but total value of common stock remains unchanged.

b.

Numbers of outstanding shares are 300,000 shares

par value of the stock = $3.33

c.

Total Market value of the stock remains the same but the market value of the share will be changes with stock split ratio. Total value remains same as $24,000,000 but per share value will be $80 ($24,000,000 / 300,000 ).

Step-by-step explanation:

Stock split increase the numbers of shares with a specific given ratio but the common equity value remains same that's why the par value of the share decreases with respective ratio.

Before the split the balance in the Common Stock account was:

Common Stock = 100,000 shares x $10 = $1,000,000

After the split shares outstanding are

3 for 1 split will double the Outstanding numbers of shares

Outstanding numbers of shares = 100,000 shares x 3/1 = 300,000 shares

After the split par value is:

Total value of stock remains same after the split

Par value = Total value / Outstanding numbers of shares after split

Par value = $1,000,000 / 300,000 = $3.33

After the split the balance in Common Stock is

Balance in the common stock will remain same as $1,000,000