A company has 10 million common shares authorized and 2.5 million shares issued.The par value is $1 per share and the market price is $30 when the company declares a 4-for-1 stock split.Which of the following is correct?
A)There will be a transfer of $2.5 million from retained earnings to the common stock account.
B)For every one share of stock owned,a shareholder will receive four shares and will now own 5 shares of stock.
C)The shares issued and outstanding will all quadruple while the par value will be reduced to $0.25 per share.
D)The company will be unable to declare a 4-for-1 split because it does not have enough authorized shares to issue the split.

Question

Quizplus · Accepted Answer

A stock split does not involve any transfer of funds between the retained earnings and common stock accounts. 
In a 4-for-1 stock split, for every one share of stock owned, a shareholder will receive four shares, so the shareholder will now own 5 shares of stock (4 additional shares plus the original share). 
The shares issued and outstanding will all increase by a factor of four, so there will be 10 million shares issued and outstanding after the split. The par value will be reduced proportionally to reflect the increase in shares, so the par value will be reduced to $0.25 per share. 
The fact that the company has 10 million authorized shares is sufficient to issue a 4-for-1 split, as the split does not increase the number of authorized shares.

A Company Has 10 Million Common Shares Authorized and 2