A dividend is a distribution to stockholders on a proportional basis.
The most common type of dividend is a cash dividend,
but could also be property or stock dividends as well.
The focus of this video will accounting for stock dividends
A stock dividend is a proportional distribution of a company’s own stock.
Although stockholders receive more shares,
their ownership percentage remains the same.
So let’s answer the question,
why stock dividends instead of cash dividends?
The primary reason is to meet the stockholders’ expectations
about receiving dividends-without spending cash.
Companies that are cash poor or saving cash for some reason might do this.
You can see a few other reasons listed on the slide.
Accounting for stock dividends falls into two categories
depending on the size of stock distribution.
Small stock dividends are usually less than 25% of the issued stock.
You will see an example of this size of dividend shortly.
Large stock dividends are usually more than 25% of the issued stock
and are not covered in this video.
Recording stock dividends is a two-step process:
Step 1 is calculate the number of new shares to be distributed, and
Step 2 is the recording of the stock dividend journal entry.
We calculate the new shares to be distributed
by taking the issued shares times the declaration percentage.
This equals the new shares.
The journal entry to record the distribution of new shares is a debit to Retained Earnings.
The amount of this debit is the number of new shares times the market price.
Common Stock is then credited.
Note that sometimes companies use an account called “Common Stock Distributable."
If your course uses that,
I would encourage you to review an example in your text,
because there is actually one extra journal entry you'll need to make.
But the concept of accounting for stock dividends
is the same as what I am showing here.
Anyway, Common Stock is credited for the number of new shares
times the par value of the stock.
Finally, Paid-in Capital in Excess of Par is credited for the difference.
Let’s look at an example.
The Shins Corporation has a balance of $400,000 in retained earnings.
It declares a 10% stock dividend on its 100,000 shares of $1 par value common stock.
The current fair market value of its stock is $15 per share.
You can see the Stockholders’ Equity section prior to stock dividend declaration.
So step 1 is determine the number of new shares to be distributed.
In this case, that’s 10,000 additional shares of stock.
So Retained Earnings is debited for $150,000,
which is the number of new shares (10,000) times the market price of the stock ($15).
Common Stock is credited for $10,000
which is the number of new shares (10,000) times the par value of the stock ($1).
Finally, Paid-in Capital in Excess of Par is credited for the difference which is $140,000.
Let’s compare the Stockholders’ Equity section before and after the stock dividend
Notice that the total stockholders’ equity is still $900,000.
All that's happened is $150,000 of Retained Earnings
has moved from that section to the Paid-In Capital section.
So make sure you remember that stock dividends
don’t change total stockholders’ equity like cash dividends do.