In this video, we walk through 5 FAR practice questions covering the journal entries for issuing stock, stock dividends, and stock splits. These questions are from FAR content area 2 on the AICPA CPA exam blueprints: Select Balance Sheet Accounts.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Issuing Stock, Stock Dividends, and Stock Splits
When companies engage in stock-related transactions, such as issuing stock, declaring stock dividends, or executing stock splits, different accounts are affected in specific ways. This guide provides an in-depth look at the journal entries required for stock issuances, stock dividends (both small and large), and stock splits, with clear examples to aid understanding.
1. Stock Issuance Journal Entries
Stock issuance is when a company sells new shares to investors. This can involve common stock or preferred stock, which may be issued at par value, above par, or below market value.
Journal Entry Structure for Stock Issuance:
- Debit: Cash (or other asset received in exchange for the shares).
- Credit: Common stock or preferred stock at par value.
- Credit: Additional paid-in capital (APIC) for any amount received above par value.
Example 1: Common Stock Issued at Par Value
Suppose Beta Corp. issues 10,000 shares of common stock with a par value of $5 per share at par value. The entry would be:
- Debit Cash $50,000 (10,000 shares × $5)
- Credit Common stock $50,000 (10,000 shares × $5)
Example 2: Preferred Stock Issued Above Par Value
Assume Beta Corp. issues 2,000 shares of preferred stock with a par value of $10 per share at $15 per share. The entry would be:
- Debit Cash $30,000 (2,000 shares × $15)
- Credit Preferred stock $20,000 (2,000 shares × $10 par)
- Credit Additional paid-in capital – preferred stock $10,000 (2,000 shares × $5 excess)
2. Stock Dividends Journal Entries
A stock dividend is when a company distributes additional shares to existing shareholders. Stock dividends are classified as either small (typically less than 20-25% of outstanding shares) or large (more than 20-25% of outstanding shares).
Small Stock Dividend (Recorded at Market Value)
For small stock dividends, retained earnings are debited at the market value of the shares being issued, with credits to both the common stock and APIC accounts.
Example: Gamma Inc. has 1,000,000 shares of common stock outstanding with a par value of $1. The company declares a 10% stock dividend when the market price is $20 per share.
- Calculation:
- New shares issued = 1,000,000 × 10% = 100,000 shares.
- Retained earnings = 100,000 shares × $20 market price = $2,000,000.
- Journal Entry:
- Debit Retained earnings $2,000,000 (100,000 shares × $20)
- Credit Common stock $100,000 (100,000 shares × $1 par value)
- Credit Additional paid-in capital – common stock $1,900,000 ($2,000,000 – $100,000)
Large Stock Dividend (Recorded at Par Value)
For large stock dividends, retained earnings are debited only at the par value of the shares being issued.
Example: Delta Corp. has 500,000 shares outstanding with a par value of $2 per share. The company declares a 40% stock dividend.
- Calculation:
- New shares issued = 500,000 × 40% = 200,000 shares.
- Retained earnings = 200,000 shares × $2 par value = $400,000.
- Journal Entry:
- Debit Retained earnings $400,000 (200,000 shares × $2)
- Credit Common stock $400,000 (200,000 shares × $2 par value)
3. Stock Splits Journal Entries
A stock split increases the number of shares outstanding by a specific ratio and proportionally reduces the par value per share. Unlike stock issuances or stock dividends, no journal entry is required for stock splits because they do not impact total equity—only the structure of shares and par value changes.
Example: Epsilon Inc. has 1,000,000 shares of common stock with a par value of $10 per share. The company declares a 2-for-1 stock split.
- Effect of the Split:
- New number of shares = 1,000,000 × 2 = 2,000,000 shares.
- New par value per share = $10 ÷ 2 = $5 per share.
- Journal Entry: No journal entry is required. The only change is a memorandum entry noting the adjusted number of shares and new par value per share.
Summary of Journal Entries by Transaction Type
| Transaction Type | Debit | Credit | Note |
|---|---|---|---|
| Stock Issuance | Cash | Common stock (at par) | APIC credited for any amount over par value |
| Preferred stock (at par, if applicable) | |||
| Small Stock Dividend | Retained earnings | Common stock (at par) | APIC credited for excess over par |
| Additional paid-in capital (APIC) | |||
| Large Stock Dividend | Retained earnings | Common stock (at par) | No APIC entry |
| Stock Split | No entry required | No entry required | Only a memorandum entry to record share and par value |
Key Takeaways
- Stock Issuances impact cash or another asset, common or preferred stock at par value, and APIC for any excess amount.
- Small Stock Dividends use market value for retained earnings and distribute between common stock and APIC.
- Large Stock Dividends use par value for retained earnings and only impact common stock.
- Stock Splits adjust shares and par value but require no journal entry, only a memorandum entry to reflect the changes.
Understanding these entries helps clarify how each type of transaction affects a company’s financial statements and equity structure.
