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How are corporate actions accounted for?

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A rights offering is the distribution of subscription rights (a negotiable certificate) to existing shareholders in proportion to their ownership interest, which allows the shareholders to subscribe for a new issue before the shares are offered to the general public.  A subscription right is a negotiable certificate entitling its holder to purchase a certain amount of a new issue of shares of capital stock at a subscription price, usually significantly below the current market price, during the subscription period.  When a company issues shares in a rights offering, the balance sheet changes in two ways:

  1. Cash and/or another asset account for cash not yet received for subscriptions increases by the amount of the net sales proceeds.
  2. The paid-in capital accounts (i.e., capital stock and paid-in surplus) in the owners’ equity section increase on the opposite side of the balance sheet by a corresponding amount.

A stock dividend is a dividend in the form of a company’s own shares distributed pro rata to its shareholders in the place of, or in addition to, a cash dividend, achieved by transferring a certain value from the owners’ equity retained earnings account to the paid-in capital accounts (i.e., the capitalization of earnings).  Stock dividends usually involve the distribution of shares of the same class of stock as that held by the shareholders (e.g., common stock to common shareholders), the amount usually being expressed as a percentage of one share.  The usual accounting for a stock dividend is to decrease retained earnings and increase the paid-in capital accounts by a corresponding amount, the amount transferred depending on the size of the dividend.

Stock Dividends and the Capitalization of Earnings (Example)
A company has 10,000 shares of par €1 common stock issued and outstanding.  It declares a 10% (“small”) stock dividend on 1 July 2017.  The current market price of €50 is used for valuation.
1 Jul 17 Retained Earnings 50,000
Capital Stock 1,000
Paid-In Surplus 49,000
To record the declaration of a cash dividend on 1 Jul 2017

A stock split is an increase in the number of a company’s outstanding shares while proportionately decreasing each individual share’s book value by decreasing the par or stated value of the shares without any transfer from the retained earnings account to the paid-in capital accounts.  In a traditional stock split, the number of shares outstanding is increased, while the par value per share decreases, a two-for-one (2:1) split, for example, doubling the shares outstanding.  The par value per share is reduced pro rata so that the total value of the capital stock account remains the same.

A reverse split is a decrease in the number of issued shares of a company’s stock while proportionately increasing each individual share’s book value, achieved by increasing the par or stated value of a company’s shares without any transfer from the retained earnings account to the paid-in capital accounts.

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