M8-23. Assessing the Financial Statement Effects of a Stock Split

The following is taken from a Monster Beverage press release dated October 14, 2016.

Monster Beverage Corporation today announced that its Board of Directors has approved a 3-for-1 split of its common stock which will be effected in the form of a 200% stock dividend. The additional shares will be distributed on November 9, 2016 to stockholders of record at the close of business (Eastern Time) on October 26, 2016. The Company anticipates its common stock to begin trading at the split-adjusted price on November 10, 2016. Upon completion of the stock split, the number of outstanding shares of the Companys common stock will triple to approximately 571 million shares.

The Monster Beverage common stock has a par value of $0.005. What adjustments will Monster Beverage Corporation make to its balance sheet as a result of the stock split?

Select the statement below that is incorrect.

Each shareholder receives two additional shares for each one shares owned, thus tripling the outstanding shares but the par value of the shares remained unchanged.

On the income statement, earnings per share is recomputed to reflect the additional shares outstanding after the split for 2016 only, the year the split occurred. EPS is not recomputed for the other years presented on the income statement.

The press release does not report that the par value of the stock will be reduced; therefore, an accounting entry is required to transfer the par value of the additional shares issued from retained earnings to the common stock account.

The accounting entry required to transfer the par value of the additional shares issued will increase par value and reduce retained earnings by $1.9 million.