The common stock of Buffalo Inc. is currently selling at $113 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $68 per share. 8.40 million shares are issued and outstanding.

Required:
Prepare the necessary journal entries assuming the following.

a. The board votes a 2-for-l stock split.
b. The board votes a 100% stock dividend. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

2. Both methods increase the outstanding number of shares by 100%. However, with a stock split of 2-for-1, there is no journal entry except a memorandum record to state the split.

Secondly, with a stock split or 2-for-1, the market price is also halved. This does not happen with a stock dividend. The market forces will determine and correct the market price to an acceptable level. A stock dividend requires some accounting entries to be made.

Explanation:

a) Data and Calculations:

Current market price of common stock per share = $113

Par value per share = $10

Book value per share = $68

Shares issued and outstanding = 8.40 million

a. The board votes a 2-for-l stock split:

Shares outstanding = 16.80 million shares

Market price = $56.50

Journal Entry:

No journal entry required except a memorandum to record the split. The value of common stock remains the same.

b. The board votes a 100% stock dividend:

Shares outstanding will increase to 16.80 million shares

Market price = $113 and level off based on demand and supply.

Journal Entry:

Stock Dividend (Retained Earnings) $84 million

Common Stock $84 million