08 Investor Stock Dividends & Splits & Rights

Question 1

If stock rights are not exercised and lapse, what entry should the investor make?

Answer 1

The investor writes-off the stock rights and recognizes a loss. The entry is: DR: Loss on Expiration of Stock Rights CR: Security Stock Rights

Question 2

What is the accounting treatment by an investor when a stock split occurs?

Answer 2

Investor adjusts per share cost; not total cost. Original cost is divided by new total number of share (after split) to get new per share cost.

Question 3

What is the accounting treatment by an investor when a stock dividend is received?

Answer 3

Investor adjusts per share cost; not total cost. Original cost is divided by new total number of shares (after stock dividend) to get new per share cost.

Question 4

How is the value of a stock right determined when the per share market value of rights is given?

Answer 4

The carrying value of the investment at the time the rights are received is allocated between the shares of stock and the newly acquired rights based on the relative market value of each set (total share and total rights). The amount allocated to the total rights is then divided by the number of rights received to get the value of each right.

Question 5

What entry is made by an investor who receives stock rights?

Answer 5

An entry is made to transfer some of the cost of the investment in the stock that “earned “ the rights to an account for the rights. The entry is: DR: Security Stock Rights CR: Investment