This audio will introduce you to stock dividends and stock splits and stock rights.
Note that the stock dividends and stock splits are not recorded as income. Investor continues to own the same proportion of the stocks in the investee entity, as before. However, an investor is required to make a memo entry to record the additional stocks received as stock dividends or stock splits. The investor is also required to recompute the per share cost of the stock.
The investee company may issue the stock rights to satisfy the investor’s preemptive right to maintain an existing level of ownership in the investee. The investor may also receive stock rights to purchase additional stock in the investee company below the existing market price. Stock rights may be issued below the existing market price to encourage the exercise of the rights. Note that the stock rights are separable, this is, that they have their own market, and should be accounted for separately from the investment in common stock. The rights that represent the possible dilution of the investor ownership, should be recorded by allocating the cost of the stock between the market value of the rights, and the market value of the stock.