Chapter 13, Problem E13.31E

To determine

Stock split:

The Stock split is a process undertaken by the corporation in which it divide its share of larger nominal value in to large number of shares of smaller nominal value. The process is undertaken by the company to reduce the market value of its shares and to keep it under control as it will get diluted in larger number of shares.

The effect of stock split is that there is no change in total stockholder’s equity or any other account in the Stockholder’s equity section amount-wise. Rather just the par value of authorized and issued stock capital of respective category gets diluted by increasing the number of shares.

There is not journal entry is passed for there is no change in amount of stock capital. However, a memorandum journal entry without any debit and credit amount is passed in the books by debiting the stock capital (gets splitted) with nominal value and crediting it with new nominal value for getting it changed in the books.

Stock Dividend:

The Dividend is the return provided by the corporation to its investors in anticipation of profits earned on the amount invested. The Dividend may be two forms: One on which there are commitment of assets to be paid i.e. cash (referred as Cash dividend) and other when the free sharers are issued to the investors in proportion of their holdings (referred as Stock dividend).There is no change in total assets and total stockholder’s equity in case of Stock dividend. Only the amounts in various accounts within Stockholders’ account changes.

Treasury Stock:

The Treasury stock is a own stock capital which has been purchased by the corporation for reissue it again among the inventors or for retirement of stock capital especially preferred stock capital which contain fixed preferred dividend commitment.

Whenever, the corporation observed surplus money in the business and favorable market prices, it purchased its own stock in the open market at a prevalent price and carried in the books as reduction in stockholder’s equity and issued shares.

Requirement a:

The effect of Stock dividend on the Stockholder’s equity of the corporation.

To determine

Requirement-b:

The effect of Stock split on the Stockholder’s equity of the corporation.

To determine

Requirement-c:

The effect of purchase of treasury stock on the Stockholder’s equity of the corporation.

To determine

Requirement-d:

The effect on stockholder’s equity section of sale of treasury stock.