Spiceland11e_Ch18_PPT_Instructor.pptx

Chapter 18 Shareholders’ Equity Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw ...

Chapter 18 Shareholders’ Equity Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-1 The Nature of Shareholders’ Equity External = Debt + Equity Financi ng Owners Creditor ’ s’ Interest Interest Assets − Liabilit = Sharehold ies ers’ Equity Net Assets 18-02 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-1 Financial Reporting Overview Paid-in Capital Shareholders’ Retained Equity Earnings Treasury Stock Accumulated Other Comprehensive Income 18-03 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  EXPOSITION CORPORATION LO18-1 Balance Sheet December 31, 2024 ($ in millions) Shareholders’ Equity Paid-in capital Capital stock (par): Preferred stock, 10%, $10 par, cumulative, $100 Detailed nonparticipating Common stock, $1 par 55 Shareholders Common stock, dividends distributable Additional paid-in capital: 5 ’ Equity Paid-in capital—excess of par, preferred Paid-in capital—excess of par, common 260 50 Presentation Paid-in capital—share purchase 8 Paid-in capital—conversion of bonds 7 Paid-in capital—stock options 9 Paid-in capital—restricted stock 5 Assets Paid-in capital—lapse of stock options 1 $3,000 Total paid-in capital $500 Liabilities Retained earnings 1,670 $1,000 Accumulated other comprehensive income: Gain (loss) on AFS investments (85) (unrealized) Net unrecognized gain (loss) on pensions (75) Deferred gain (loss) on derivatives (4) Adjustments from foreign currency 0 (164) translation Treasury stock (at cost) (6) 18-04 Total shareholders’ Copyright © 2023 McGraw Hillequity $2,000 LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-1 Components of Shareholders’ Equity Paid-in Capital Consists primarily of amounts: – Invested by shareholders when they purchase shares of stock from the corporation or – Arise from the company buying back some of those shares or – From share-based compensation activities Retained Earnings Earnings accumulated on behalf of the shareholders and reported as a single amount. Treasury Stock Shares previously sold to shareholders that are 18-05 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-2 Components of Shareholders’ Equity (continued) Accumulated Other Comprehensive Income Extends our view of income beyond net income reported in an income statement to include four types of gains and losses not included in income statements: 1. Net holding gains (losses) on available-for- sale investment in debt securities 2. Gains (losses) from and amendments to postretirement benefit plans 3. Deferred gains (losses) on derivatives 4. Adjustments from foreign currency translation 18-06 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-2 Statement of Comprehensive Income We report two attributes of OCI: – Components of comprehensive income created during the reporting period in the statement of comprehensive income – The comprehensive income accumulated (AOCI) over the current and prior periods in the balance sheet ($ in millions) Net income $XXX Other comprehensive income Gains (loss) on AFS investments (unrealized), (net $ of tax) X Gain (loss) from amendments to postretirement (X) benefit plans (net of tax) Deferred gain (loss) on derivatives (net of tax) (X) Adjustments from foreign currency translation X XX (net of tax) Comprehensive income $XXX 18-7 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 The Corporate Organization— Advantages Limited Liability A corporation is a separate legal entity (separate and distinct from its owners), responsible for its own debts – The owners are not personally liable for debts of a corporation Shareholders’ liability is limited to the amounts they invest in the company when they purchase shares Ease of Raising Capital Corporations sell ownership interest in the form of shares of stock and hence ownership rights are easily transferred 18-8 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 The Corporate Organization— Disadvantages The state and federal governments impose extensive reporting requirements – Primarily the required paperwork is intended to ensure adequate disclosure of information needed by investors and creditors Double taxation – Corporations first pay income taxes on their earnings – Then, when those earnings are distributed as cash dividends, shareholders pay personal income taxes on the previously taxed earnings 18-9 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 Types of Corporations Not-for-profit corporations may be owned: – By the public sector – By a governmental unit Examples: Churches, hospitals, universities, and charities; Government-owned—the Federal Deposit Insurance Corporation (FDIC) Corporations organized for profit may be: – Publicly held: Stock of publicly held corporations is available for purchase by the general public – Privately held: Shares are owned by only a few individuals (perhaps a family) and are not available to the general public Frequently, companies begin as privately held corporations and then go public. Example: 18-10 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 The Model Business Corporation Act Designed to serve as a guide to states in the development of their corporation statutes Variations among state laws influence GAAP pertaining to shareholders’ equity transactions The Articles of Incorporation (Corporate Charter) Describe: – The nature of the firm’s business activities – The shares to be issued – The composition of the initial board of directors 18-11 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 Fundamental Share Rights Common shares: Ownership rights held by common shareholders, unless specifically withheld by agreement with the shareholders, are: – The right to vote on matters that come before the shareholders Including the election of corporate directors – The right to share in profits when dividends are declared – The right to share in the distribution of assets if the company is liquidated Preemptive right: Right to maintain one’s percentage share of ownership when new shares are issued 18-12 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 Distinguishing Classes of Shares If more than one class of shares is authorized by the articles of incorporation, the specific rights of each must be stated Terminologies of different share types: – Class A, class B, and so on (Tyson Foods) – Preferred stock, common stock, and class B stock (Hershey’s) – Common and preferred (HP) – Common stock and capital stock (Alphabet, Inc.) – Common and serial preferred (Smucker’s) 18-13 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 Typical Rights of Preferred Shares Often, shares with certain preferences or features that distinguish them from common shares are designated as preferred stock Rights include one or both of the following: If the board of directors Preferred shareholders declares dividends, customarily have a preferred shareholders preference over will receive the common shareholders designated dividend as to the distribution of before any dividends assets in the event the are paid to common corporation is dissolved shareholders 18-14 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 Typical Rights of Preferred Shares (continued) Preferred shareholders sometimes have the right of conversion or a redemption privilege Preferred shares may be: – Cumulative or noncumulative – Participating or nonparticipating Dividends in arrears accumulate and must be made up in a later dividend year before any dividends are paid on common shares Allows preferred shareholders to receive additional dividends beyond the stated amount 18-15 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  COVID-19: ACCOUNTING AND REPORTING The Coronavirus Aid, Relief, and Economic Security (CARES) Act was designed to provide stimulus relief to businesses affected by COVID-19 IMPLICATIONS in the form of loans, grants, and tax changes. One provision of the CARES Act was the Payroll Support Program (PSP), which provided large loans to eligible businesses (e.g., airlines) that incurred losses related to COVID-19. One caveat of this assistance, though, was that it required the borrowing company to issue warrants* to the government (the Treasury Department), along with the debt instrument. These warrants enable the government to buy a specified number of shares of the company’s stock at a specified exercise price. The warrants must have met certain requirements, including participation by the U.S. Treasury Department for the benefit of taxpayers in the company’s stock price appreciation, but the government will not exercise voting power with respect to any shares of common stock acquired. *or other equity interest or senior debt instrument Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  COVID-19: ACCOUNTING AND REPORTING Interestingly, in some cases, theIMPLICATIONS amounts of stock represented by the warrants were sizable enough(continued) to put the government among the largest shareholders of a company. The number of shares was based on the amount borrowed. For example, if United Airlines took full advantage of the government aid, the U.S. taxpayers would own over 18 million shares, or about 7.5% of the shares outstanding, making taxpayers the fourth-largest shareholder of United. To illustrate accounting for funds borrowed under the PSP, let’s suppose that Friendly Airlines obtains a $200 million loan under the program and, in conjunction with the loan, issues a warrant the government can exercise to buy 15 million shares of its common stock at $33 per share. Friendly would record both the debt and the warrants, allocating the Cash 20 $200 million received between0the loan liability and the warrant on a relative fair value basis as described in Chapter 14: Note payable Warrant Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-3 The Concept of Par Value Most shares continue to bear arbitrarily designated par amounts Shares with nominal par amounts became common to dodge elaborate statutory rules pertaining to par value shares Like the designations of common and preferred shares, the concepts of par value and legal capital have been eliminated entirely from the Model Business Corporation Act 18-18 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-4 Shares Sold for Cash Dow Industrial sells 10 million of its common shares, $1 par per share, for $10 per share: ($ in millions) Journal Entry Debit Credit Cash (10 million shares at $10 per 100 Common share) stock (10 million shares at $1 par per share) 10 Paid-in capital—excess of par 90 (Remainder) If the shares are no-par, the entry is as follows: ($ in millions) Journal Entry Debit Credit Cash (10 million shares at $10 per 100 share) Common stock 100 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw18-19  LO18-4 Shares Issued for Noncash Consideration A company might issue its shares for consideration other than cash. That is: – May be to pay for promotional and legal services with shares rather than with cash – Shares may be given in payment for land, or for equipment, or for some other noncash asset Issuance of shares should be recorded at grant- date fair value This treatment is consistent with the accounting requirement for employee share-based payment awards and with the general rule for accounting for noncash transactions 18-20 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-4 Shares Sold for Noncash Consideration DuMont Chemicals issues 1 million of its common shares, $1 par per share, in exchange for a custom- built factory for which no cash price is available. Today’s issue of The Wall Street Journal lists DuMont’s stock at $10 per share. ($ in millions) Journal Entry Debit Credit Property, plant, and equipment 10 Common stock 1 Paid-in capital—excess of par 9 The quoted market price for the shares issued might be the best evidence of fair value 18-21 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-4 More Than One Security Issued for a Single Price Cash received usually is the sum of the separate market values of the two securities If only one security’s value is known, the second security’s market value is inferred from the total selling price The total selling price is allocated between the two securities, in proportion to their relative market values 18-22 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-4 More Than One Security Sold for a Single Price (continued) AP&P issues 4 million of its common shares, $1 par per share, and 2 million of its preferred shares, $5 par, for $100 million. Today’s issue of The Wall Street Journal lists AP&P’s common at $10 per share. There is no established market for the preferred 4 million shares @ $10 / sh. = ($ in millions) shares. $40 million Journal Entry Debit Credit Cash 100 Common stock (4 million shares x $1 4 Paid-in capital—excess of par, par) 36 common Preferred stock (2 million shares x $5 10 par) Paid-in capital—excess of par, 50 preferred $100 million − $40 million = $60 million 18-23 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-4 Share Issue Costs In 2020, Mohawk Group Holdings, sold 3,357,140 shares of its $0.0001 par common stock at $7 per share. The company received net proceeds from the public offering of $20,600,000, after deducting underwriting discounts and commissions and other offering expenses. Mohawk’s entry to record the sale was as follows: ($ in millions) Journal Entry Debit Credit Cash 20,600,000 Common stock 336 Paid-in capital—excess of par 20,599,6 Reduce the net cash proceeds from selling the 64 shares and thus paid-in capital—excess of par The cash proceeds is the net amount received after paying share issue costs 18-24 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Share Repurchases Viewed as a way to “distribute” company profits without paying dividends Decreasing the supply of shares in the marketplace supports the price of remaining shares Acquisition of a company’s own shares does not create an asset Companies buy back shares to offset the increase in shares issued to employees in compensation Note 11: Stockholders’plans Equity (in part) Our board of directors has approved a program to repurchase shares of our common stock to reduce the dilutive effect of our stock option and stock purchase plans. 18-25 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Decision Maker’s Perspective Stock dividend Shares might be reacquired Proposed merger to distribute in a: Defense against a hostile takeover Shares can be called treasury How to account for stock OR the buyback? Shares can be formally retired 18-26 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Comparison of Share Retirement and Treasury Stock Accounting—Share Buybacks American Semiconductor’s balance sheet included the following: Shareholders’ Equity ($ in millions) Common stock, 100 million shares at $1 $ par 100 Paid-in capital—excess of par 900 Paid-in capital—share repurchase 2 Retained earnings 2,000 Reacquired 1 million of its common shares 18-27 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Comparison of Share Retirement and Treasury Stock Accounting—Share Buybacks, Case 1 Case 1: Shares repurchased at $7 per share Retirement Common stock ($1 par × 1 million shares) 1 Paid-in capital—excess of par ($9 9 Paid-in capital—share repurchase (difference) per sh.) 3 Cash 7 Treasury Stock Treasury stock (cost) 7 Cash 7 We credit PIC—share repurchase for the amount needed to make debits equal credits Weinreduce the entry. common stock and PIC—excess of par the same amounts they were increased when the shares were issued: Cash 10 Common stock 1 PIC—excess of par 9 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw 18-28  Comparison of Share Retirement and LO18-5 Treasury Stock Accounting—Share Buybacks, Case 2 OR Case 2: Shares repurchased at $13 per share Retirement Common stock ($1 par × 1 million shares) 1 Paid-in capital—excess of par ($9 per sh.) 9 Paid-in capital—share repurchase 2* Retained earnings (difference) 1 Cash 13 *Because there is a $2 million credit balance. Treasury Stock Treasury stock (cost) 13 Cash 13 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw 18-29  LO18-5 Accounting for Treasury Stock Purchase of treasury stock is viewed as a temporary reduction of shareholders’ equity Cost of acquiring the shares is “temporarily” debited to the treasury stock account Shares are considered to be issued, but not outstanding Purchase of treasury stock and its subsequent resale is considered to be a “single transaction” This approach to accounting for treasury18-30 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Resale of Shares Subsequent sale of shares after shares are retired is recorded exactly like any sale of shares Resale of treasury shares is viewed as the consummation of the “single transaction” begun when the treasury shares were purchased Allocating the cost of treasury shares occurs when the shares are resold 18-31 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Comparison of Share Retirement and Treasury Stock Accounting—Subsequent Sale of Shares American Semiconductor sold 1 million shares after reacquiring shares at $13 per share. Sold 1 million shares Case A: Shares sold at $14 per share Retirement Cash 14 Common stock (par) 1 Paid-in capital—excess of par 13 Treasury Stock Cash 14 Treasury stock (cost) 1 Paid-in capital—share 3 1 repurchase 18-32 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-5 Comparison of Share Retirement and Treasury Stock Accounting—Subsequent Sale of Shares (continued) American Semiconductor sold 1 million shares after reacquiring shares at $13 per share. Case B: Shares sold at $10 per share Retirement Cash 10 Common stock (par) 1 Paid-in capital—excess of par 9 Treasury Stock Cas 10 h Retained earnings (to balance) 1 Paid-in capital—Share repurchase 2* Treasury stock (cost) 13 *Because there is a $2 million credit balance. 18-33 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-6 Characteristics of Retained Earnings Retained earnings represents a corporation’s accumulated, undistributed net income (or net loss) A more descriptive title would be reinvested earnings Retained earnings Credit balance Debit balance Indicates a dollar Indicates amount of assets deficit previously earned and reinvested by the firm 18-34 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Dividends Distributions of assets the company has earned on behalf of its shareholders Dividends > Assets earned by the paid company Management is returning to shareholders a portion of their investments Liquidating Dividend Dividend exceeds the balance in retained earnings, the excess is referred to as a liquidating dividend Any portion of a dividend not representing a distribution of earnings should be debited to additional paid-in capital 18-35 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Retained Earnings Restrictions Designates a portion of the balance as being unavailable for dividends Indicated by a disclosure note to the financial statements Rarely, a formal journal entry may be used to reclassify a portion of retained earnings to an “appropriated” retained earnings account A restriction of retained earnings communicates management’s intention to withhold assets represented by a specified portion of the retained earnings balance 18-36 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Cash Dividends No legal obligation exists for paying dividends to shareholders Liability is not recorded until a company’s board of directors votes to declare a dividend Directors Liability Retained declare a is earnings is cash dividend recorde reduced d Before the payment actually can be made, a listing must be assembled of shareholders entitled to receive the dividend 18-37 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Cash Dividends (continued) Date of record – Stated specific date as to when the determination will be made of the recipients of the dividends – Registered owners of shares of stock on this date are entitled to receive the To dividend be a Investor must purchase the registered shares before the ex- owner dividend date Usually is one business day before the date of record 18-38 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Cash Dividends (concluded) On June 1, the board of directors of Craft Industries declares a cash dividend of $2 per share on its 100 million shares, payable to shareholders of record June 15, to be paid July 1: ($ in millions) Journal Entry Debit Credit June 1—Declaration Date Retained earnings 200 Cash dividends payable 200 June 14—Ex-Dividend Date No entry 100 million shares at $2 per June 15—Date of Record share No entry July 1—Payment Date Cash dividends payable 200 Cash 200 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw 18-39  LO18-7 Dividends on Preferred Shares The shareholders’ equity section of Corbin Enterprises includes the items shown below. The board of directors declared dividends of $360,000, $500,000, and $700,000 in its first three years of operation —2023, 2024, and 2025 respectively. Note: The preferred shareholders are entitled to dividends of $480,000 (8% × $6,000,000). Common stock $ 3,000,000 Paid-in capital—excess of par, 9,800,000 Preferred stock, 8% common 6,000,000 Paid-in capital—excess of par, 780,000 preferred Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years, assuming that the preferred stock is cumulative and nonparticipating. Preferred Common 2023 $360,000 $0 2024 500,000 0 2025 580,000 120,000 (remainder) Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw 18-40  LO18-7 Property Dividends Noncash asset distributed to shareholders as dividend Often called a dividend in kind or a nonreciprocal transfer to owners Securities held as investments are the assets most often distributed in a property dividend Should be recorded at the fair value of the assets to be distributed (as in any noncash transaction) 18-41 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-7 Property Dividends (continued) On October 1, the board of directors of Craft Industries declares a property dividend of 2 million shares of Beaman Corporation’s preferred stock. Craft had purchased in March as an investment (book value: $9 million). The investment shares have a fair value of $5 per share, $10 million. (2 million shares at $5 per share) The property dividend is payable to shareholders of record October 15, to be distributed November 1.millions) ($ in Journal Entry Debit Credit October 1—Declaration Date Investment in equity securities 1 Gain on investments ($10 - $9) 1 Retained earnings 10 Property dividends 10 payable Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw 18-42  LO18-7 Property Dividends (concluded) On October 1, the board of directors of Craft Industries declares a property dividend of 2 million shares of Beaman Corporation’s preferred stock. Craft had purchased in March as an investment (book value: $9 million). The investment shares have a fair value of $5 per share, $10 million. The property dividend is payable to shareholders of ($ in millions) record October Journal15, to be distributed November Entry Debit1. Credit October 15—Date of Record No entry November 1—Payment Date Property dividends payable 10 Investment in equity 10 securities 18-43 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-8 Stock Dividends Distribution of additional shares of stock to current shareholders of the corporation Affects neither the assets nor the liabilities of the firm Shareholders’ proportional interest in the firm remains unchanged 18-44 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-8 Stock Dividends (continued) Craft declares and distributes a 10% common stock dividend (10 million shares) when the market value of the $1 par common stock is $12 per share. ($ in millions) Journal Entry Debit Credit Retained earnings 120 Common stock 10 Paid-in capital—excess of par 110 10 million shares at $12 per share 10 million shares at $1 par per share Remaind Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent ofer McGraw 18-45  LO18-8 Reasons for Stock Dividends Company tries to give shareholders the illusion that they are receiving a real dividend Merely to enable the corporation to take advantage of the accepted accounting practice of capitalizing retained earnings 18-46 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-8 Stock Splits Objective: To induce the per share market price decline that follows The motivation for reducing the per share market price is to increase the stock’s marketability by making it attractive to a larger number of potential investors Example: After a company declares a 100% stock dividend on 100 million shares of common stock, with a per share market price of $12, it then has 200 million shares, each with an approximate market value of $6 18-47 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-8 Stock Splits (continued) A stock distribution of 25% or higher can be accounted for in one of two ways: – As a “large” stock dividend (stock split effected in the form of a stock dividend) – As a stock split (thus, a 100% stock dividend could be labeled a 2-for-1 stock split and accounted for as such) Accounting treatment of a stock split is to make no journal entry Since the total par represents twice as many shares in a 2-for-1 stock split, the par value per share will reduce by one-half All records that refer to the previous amount must be changed to reflect the new amount Account for the large stock distribution as stock split effected in the form of a stock dividend avoids the change to the records by recording an entry to change the balance in the stock account 18-48 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  LO18-8 Stock Split Effected in the Form of a Stock Dividend Craft declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend (100 million shares) when the market value of the $1 par common stock is $12100permillion share: shares at $1 par per share($ in millions) Journal Entry Debit Credit Paid-in capital—excess of par 100 Common stock 100 OR 100 million shares × $1 par per share ($ in millions) Journal Entry Debit Credit Retained earnings 100 Common stock 100 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw  End of Chapter 18 18-50 Copyright © 2023 McGraw Hill LLC. All rights reserved. No reproduction or distribution without prior written consent of McGraw