Summary
Highlights
A stock dividend is a dividend paid in new shares of stock rather than cash, used by corporations to satisfy shareholder expectations without spending cash, increase marketability of shares, and emphasize reinvestment of equity.
There are two types of stock dividends: small stock dividends (20-25% of issued stock), recorded at fair market value, and large stock dividends (more than 20-25% of issued stock), recorded at par value. This video focuses only on small stock dividends.
For a 10% stock dividend, where 5,000 new shares are issued at a market value of $16 per share, a debit of $80,000 is made to stock dividends to reduce equity. This amount is split: $50,000 credited to 'common stock dividends distributable' (par value) and $30,000 credited to 'paid-in capital in excess of par'.
On the payment date, the 'common stock dividends distributable' account is decreased, and the 'common stock' account is increased to reflect the actual issuance of shares. The total stockholder's equity remains the same dollar amount, but retained earnings are converted into paid-in capital, and the number of shares outstanding increases.
A stock split involves issuing additional shares to stockholders by dividing existing shares into multiple shares. This reduces the par value per share but increases the number of shares outstanding proportionally, consequently lowering the market value per share to make the stock more accessible to investors.
Unlike stock dividends, a stock split does not require a journal entry; it is a record-keeping transaction. A two-for-one split on 50,000 shares would result in 100,000 shares outstanding, and the par value would be halved, ensuring no change to the total stockholder's equity.
Stock dividends increase common stock and paid-in capital, usually decrease retained earnings, but do not change total stockholder's equity or the par value per share. Stock splits do not change dollar amounts in equity but decrease the par value per share by splitting shares into smaller units.