A corporation began operations on October 1, 2019, with 3,000 shares of $2 par common stock authorized. The company issued common stock on several occasions during 2019 and 2020. On December 31, 2020, the company repurchased 1,000 shares of its outstanding shares and then reissued 500 of these shares on March 1, 2021. On June 1, 2021, the company's board of directors declared a 2-for-1 stock split. As a result of this stock split, which of the following is true?

Question

Quizplus · Accepted Answer

Here's why:
a. Assets decreased: This is not necessarily true. A stock split does not directly affect the total assets of a company. It is simply a division of existing shares into more shares, which does not change the value of the company's assets.
b. The number of shares issued decreased: This is incorrect. In a 2-for-1 stock split, the number of shares issued actually increases. Each share is split into two shares, so the number of shares outstanding doubles.
c. Total liabilities decreased: This is incorrect. A stock split does not affect the liabilities of a company. Liabilities are obligations the company owes to outside parties, and a stock split does not change these obligations.
d. Total stockholders' equity remained the same: This is correct. In a stock split, the total stockholders' equity does not change. Although the number of shares outstanding increases, the par value per share decreases proportionally, leaving the total par value of all outstanding shares unchanged. Additionally, the stock split does not affect retained earnings or other components of stockholders' equity. The overall value of the company remains the same; it is just represented by a larger number of shares.
To illustrate, let's assume the company had 2,500 shares outstanding before the stock split (3,000 initially issued - 1,000 repurchased + 500 reissued). After a 2-for-1 stock split, the company would have 5,000 shares outstanding (2,500 x 2). However, the par value per share would be halved from $2 to $1, keeping the total par value the same. The market value of the company and the proportionate ownership of each shareholder would remain unchanged, just distributed over a larger number of shares.

A Corporation Began Operations on October 1, 2019, with 3,000