The main objective of a stock split is to reduce the market price of each share of stock.
- 100,000 shares will be outstanding.
- The par value of each share will be $10 .
Number and Value of Shares before and after Stock Split
|Before Stock Split||After Stock Split|
|Number of shares issued||20,000||100,000|
|Par value per share||x $50||x $10|
The total amount attributed to common stock outstanding is the same before and after the stock split. Each individual stockholder owns the same total amount of the corporation's stock. For example, if a stockholder owns 5 shares of the $50 par stock before the split (total of $250), then this same stockholder would own 25 shares of the $10 par stock after the split (total par value of $250). Essentially, only the number of shares and the par value of each share have changed, but the total value remains the same.
Based on the stock split, the market price of the share should also decrease. With a previous market price of $100 per share, the new market price should now be about $20 per share .
Because stock splits only affect the number of shares outstanding and the par value, there is no need for a journal entry. The total amount in the common stock account remains the same. However, the details of the stock split are typically disclosed on the financial statements as a note.
Treasury stock is stock that has been issued and then reacquired by the same corporation. Some of the reasons that a corporation may choose to reacquire its own stock are:
- To resell shares to employees
- To reissue the shares as bonuses to employees
- To assist in supporting the stock's market price
The cost method or the par method may be used to record the transactions associated with buying and selling shares of treasury stock. Under the cost method, the treasury stock account is debited for the purchase of the stock and credited when the stock is sold. When selling treasury stock, the credit is always for the same amount as the purchase price, similar to how we treat the par value for common and preferred stock entries.
For example, Company ABC has 10,000 shares of $10 par common stock issued and outstanding. On October 1 the corporation purchases 1,000 shares of its own common stock at $25 per share. A journal entry is made by the company to record this change.
Purchase of Treasury Stock Entry
|Oct 1||Treasury Stock (1,000 shares x $25)||$25,000|
|To record the purchase of 1,000 shares of treasury stock at $25|
Sale of Treasury Stock
|Nov 1||Cash (700 shares x $35)||$24,500|
|Treasury Stock (700 shares x $25)||$17,500|
|Paid-In Capital from Sale of Treasury Stock||$7,000|
|To record the sale of 700 shares of treasury stock at $35|
Sale of Treasury Stock at Reduced Amount Entry
|Dec 1||Cash (300 shares x $20)||$6,000|
|Paid-In Capital from Sale of Treasury Stock||$1,500|
|Treasury Stock (300 shares x $25)||$7,500|
|To record the sale of 300 shares of treasury stock at $20|
Based on the November 1 journal entry, the credit balance in the paid-in capital from sale of treasury stock account was $7,000. Therefore, the full $1,500 can be debited to this account on December 1.
As a reminder, to the extent the corporation holds treasury stock, it does not pay itself a dividend.