Overview
This lecture explains the accounting treatment for stock dividends and stock splits, including their effects on financial statements and shareholders' equity.
Stock Dividends: Definition and Purpose
- A stock dividend is a distribution of additional company shares to shareholders.
- Stock dividends only affect stockholders’ equity accounts, not assets or liabilities.
- They distribute shares in proportion to shares already owned.
- Reasons for stock dividends include preserving cash and reducing share price to attract investors.
Important Dates for Stock Dividends
- Declaration Date: Board announces a dividend; no liability is created for stock dividends.
- Record Date: Identifies shareholders eligible for the dividend; no entry is recorded.
- Distribution Date: Shares are delivered to shareholders; relevant accounts are updated.
Small vs. Large Stock Dividends
- Small stock dividend: Less than 20–25% of outstanding shares; recorded at market value.
- Large stock dividend: More than 20–25% of outstanding shares; recorded at par value.
- Small stock dividend example: Debit stock dividends for market value, credit common stock dividends distributable (par value), and credit paid in capital in excess of par (remainder).
- Large stock dividend example: Debit stock dividends for par value, credit common stock dividends distributable, and eventually increase common stock.
Journal Entries for Stock Dividends
- On declaration: Debit stock dividends, credit common stock dividends distributable (and paid-in capital in excess of par for small dividends).
- On distribution: Debit common stock dividends distributable, credit common stock.
- At period end: Close stock dividends to retained earnings.
Effect on Equity Accounts
- Issuing a stock dividend increases common stock and paid-in capital (for small dividends) but decreases retained earnings by the same amount.
- Total stockholders’ equity remains unchanged—amount is moved within equity accounts.
Stock Splits
- A stock split increases the number of shares and proportionally reduces the par value per share.
- No journal entry is required; a memorandum entry notes the event.
- After a split, the number of shares doubles and par value halves, but total dollar value in common stock remains the same.
- Stock splits make shares more affordable but don't affect equity or earnings accounts.
Comparative Financial Statement Effects
- Cash dividends decrease assets and retained earnings; stock dividends and splits do not affect assets or liabilities.
- Stock dividends increase common stock (and paid-in capital if small), decrease retained earnings, but don’t change total equity.
- Stock splits only affect the number and par value of shares, not account balances.
Key Terms & Definitions
- Stock Dividend — Distribution of the company’s own shares to shareholders.
- Stock Split — Increase in shares with a proportional reduction in par value; no change in total equity.
- Declaration Date — Date the company announces a dividend.
- Record Date — Date determining shareholder eligibility for dividends.
- Distribution Date — Date when the dividend is distributed to shareholders.
- Par Value — The nominal value of a share as stated in the corporate charter.
- Paid-in Capital in Excess of Par — Amount received from shareholders above the par value of shares.
Action Items / Next Steps
- Review journal entry examples for small and large stock dividends.
- Compare equity section before and after stock dividends and splits for understanding.
- Complete assigned readings on stockholders' equity in your textbook.