Robinson's has 15,000 shares outstanding with a par value of £1.00 per share and a market price of £36 a share.The statement of financial position shows £15,000 in the ordinary equity account,£315,000 in the additional paid in capital account,and £189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.What will the value of the ordinary equity account be after the split?

Question

Quizplus · Accepted Answer

A 3-for-2 stock split means that each shareholder will receive 1.5 shares for every one share they currently own. Therefore, the number of shares outstanding will increase from 15,000 to 22,500 (15,000 x 1.5). 
However, the par value of each share will be reduced to £0.67 (1/1.5), and the market price will also be adjusted accordingly. 
The total value of the shares outstanding will remain the same, as it is based on the market price. 
After the split, the ordinary equity account will still represent the par value of the shares outstanding, which will now be £10,125 (15,000 x £0.67). Therefore, the value of the ordinary equity account will be £15,000, the same as before the split.

Robinson's Has 15,000 Shares Outstanding with a Par Value of £1.00