11.05 Investor Stock Dividends, Splits, and Rights Flashcards
What are stock dividends?
Stock dividends are additional shares of an investee stock that an investor receives. A stock dividend is not income, it is additional ownership of the entity. When the stock dividend is received, the investor adjusts the per share (not total) carrying value of the equity investment. The investor will own additional shares, and therefore the stock dividend will reduce the per share cost basis of the stock. No journal entry is needed, unless the new securities are in a different class.
What is a stock split?
In a stock split, an investor receives additional shares of the equity investee’s stock. An example would be a two-for-one split (double the number of shares is owned but at the same value). When received, a stock split is not income but is additional ownership of the entity. Just as in the stock dividend, when the stock split is received, the investor adjusts the per share (not total) carrying value of the equity investment. The investor will own additional shares, and therefore the stock split will reduce the per share cost basis of the stock. No journal entry is recorded for a stock dividend or a stock split.
How is any gain/loss calculated on sale of shares involving stock dividends?
Upon sale of the shares (in part or total), the shares will be removed at new per share carrying value, and any gain or loss will be the difference between the selling price and the new per share value.
How is any gain/loss calculated on sale of shares involving a stock split?
When the stock subsequently is sold, the investor would recognize gain or loss.
What is a stock right?
A stock right gives the investor the privilege (right) to purchase additional shares of investee at a specific price (strike price) within a specific time. Like stock dividends and splits, stock rights are not income when received.
