Question 2: (10 points): A1, B1, C1

2) Stock dividend and stock spilt are both corporate action terms, in which the total par value remains unchanged, in addition the number of shares of the shareholders increases, and they are economically similar.The number of outstanding shares increases and the price of each share drops. However, the value of the firm does not change. A 3-for-2 stock split is the same as a 50% stock dividend. In the calculation of EPS, the total weighted average common shares will be affected by stock dividends and stock splits.

A stock dividend is considered as a large stock dividend when the new shares being issued are more than 20-25% of the total value of outstanding share prior to stock dividend. On the declaration date a journal entry is passed transferring the par value of the shares being issued from retained earning to the paid in capital section of stockholders equity.

For instance: If a corporation has 4,000 shares of common stock outstanding when it declares a 50% stock dividend, then 2,000 new shares will be issued. The stock has a par value of $.20 per share and the market value of $24 per share on declaration date the following entry will be passed on the declaration date .

Retained Earning (2,000 shares x $0.20) 400

Common stock dividend distribute 400

When the 2,000 shares are distributed to the shareholders the following journal entry will be made

Common Stock Dividend Distribute 400

Common Stock 400

In a stock split when the board of directors decide to issue a stock split of a 2-for-1 stock split, this will cause the number of shares to double, but the market price per share will reduce by half of its pre-split value. After the split every stock holders number of shares doubles but they still own the same percentage of the corporation. Although the par value per share decreases with a stock split, the total par value is unchanged.