Investor Stock Dividends, Splits, and Rights

Question 1

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

Answer 1

Dr. Security Stock Rights

Cr. Investment

Question 2

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

Answer 2

Dr. Loss on Expiration of Stock Rights

Cr. Security Stock Rights

Investor writes off the stock rights and recognizes a loss

Question 3

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

Answer 3

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 4

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

Answer 4

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 5

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

Answer 5

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 6

How is the value of a stock right determined when the per share market value of rights is NOT given?

Answer 6

1. Market Value (MV) of stock quoted without value of right (ex-right):
   (MV one Share of Stock w/o Right - Options Price w/Right) / Number of Rights to Buy One Share = Theoretical MV per right
2. Market Value (MV) of stock quoted with right (rights - on):
   (MV one Share of Stock w/Right - Option Price w/Right) / (Number of Rights to Buy One Share Plus (+) 1) = Theoretical MV per right

Question 7

What is the entry to record stock rights that have been lapsed?

Answer 7

Dr. Loss

Cr. Investment in Rights

Question 8

What is the entry to record stock rights being exercised?

Answer 8

Dr. Investment in Stock

Cr. Investment in Rights

Cr. Cash

Question 9

What can stock rights be classified as?

Answer 9

They must be classified as trading or AFS since they are equity securities

Question 10

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

Answer 10

As a memorandum entry, reducing the unit cost of all Guard stock owned.