According to a news story, “The shareholders of QED approved a 1-for-10 reverse split of QED’s common stock.” Accounting for a reverse stock split applies the same principles as accounting for a regular stock split. QED Exploration, Incorporated, is an oil development company operating in Texas and Louisiana. QED’s stockholders’ equity section before the reverse split included the following:
Common stock, authorized 30,000,000 shares, issued 23,530,000 shares .... $ 287,637
Additional paid-in capital ....................... 3,437,547
Retained income ............................ 2,220,895
Less: Treasury stock, at cost, 1,017,550 shares .............. (305,250)
Total stockholders’ equity ......................$5,640,829
1. Prepare QED’s stockholders’ equity section after the reverse stock split.
2. Comment on possible reasons for a reverse split.