Question

On June 13, the board of directors of Siewert Inc. declared a 2-for-1 stock split on its 60 million, $1 par, common shares, to be distributed on July 1. The market price of Siewert common stock was $25 on June 13. Prepare a journal entry that summarizes the declaration and distribution of the stock split if it is not to be effected in the form of a stock dividend. What is the par per share after the split?

Answer 1

Answer:

$12.5

Explanation:

For a 2 for 1 stock split, an additional share will be given to each shareholder. Thus on the 60 million shares existing, an additional 60 million shares valued at (60 million * $1 = ) $60 million will be issued.

The journal entry will be as shown below.

Debit: reserves account $60 million

Credit: common shares account $60 million.

Because there was no new cash received, the market value of the company will remain the same, and the price will adjust to keep the market value the same.

Before stock split: 60 million share at $25 per share = $1.5 billion.

After stock split, number of shares increases to 120 million, market value remains $1.5 billion. Therefore,

stock price = $1.5 billion/120 million = $12.5.