Solve Reverse Stock Split Journal Entry Example

by ADAMSeptember 20, 20230 Comments

 Welcome Back to our blog again today we will understand "reverse stock split journal entry" and it's a method in accounting.


In today's world of accounting reverse stock splits are very common. They are strategic maneuvers that companies use to adjust their stock prices and maintain compliance with regulatory requirements.


Note:- The reverse stock split limit is from 1-for-2 to 1-for-100.


What is a Reverse Stock Split?

A reverse stock split is a strategy that reduces the number of outstanding shares while increasing the share price proportionally.


Let me explain it with the help of an example: in a 1-for-3 reverse stock split, shareholders receive one new share for every 3 old shares they held. 


Why do companies perform reverse stock splits 


There are various reasons like Meeting Exchange Requirements, Enhancing Financial Image, Attracting Investors, etc.


Reverse Stock Split Journal Entry Example


Now let's solve the example:


Example Scenario:  Company JJ is planning a reverse stock split with a 1-for-4 ratio. This means that for every four old shares held by shareholders, they will receive one new share. The old par value per share is 10 INR.


reverse stock split journal entry for company JJ


  • Step 1: Determine the Ratio


Ratio: 1-for-4

  • Step 2: Calculate the New Par Value


New Par Value = Old Par Value / Reverse Stock Split Ratio

New Par Value = 10 / 4

New Par Value = 2.5 per share


  • Step 3: Manage the Capital Accounts


the JJ company needs to adjust its capital accounts to account for the reduced number of shares.


  • Step 4: Updating the Stockholders' Equity


Stockholders' equity is adjusted to reflect the new par value and the reduced number of shares.


reverse stock split journal entry will look like this:

  • Debit (Decrease) Capital Stock: 

Amount: [Number of Old Shares] * [Old Par Value per Share]

Amount: [Number of Old Shares] * [10]


  • Debit (Decrease) Additional Paid-in Capital: This account might be used to adjust the capital accounts further.


  • Credit (Increase) Common Stock: New Share


Amount: [Number of New Shares] * [New Par Value per Share]

Amount: [Number of New Shares] * [2.5]


  • Credit (Increase) Additional Paid-in Capital: - this account will reflect any additional capital received from shareholders during the reverse stock split.



Conclusion


Here in this post, we add a reverse stock split journal entry example so if you are an accounting student then you should solve this example to increase your knowledge about reverse stock split.


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