Stock dividend is a term used to describe a distribution of additional shares of stock to Q company’s stockholders in preportionto their present holdings.
In brief, the dividend is payable in additional shares ()f stock rather than in cash.
Most stock dividends consist of additional shares of common stock distributed to holders of common stock, .and our dlseussion will be limited to this type of stock.dividend.An important distinction must be drawn between a cash dividend and a stock dividend.
A caSh dividend is a distribution of cash by a corporation to its stockholders. Thus a cash dividend reduces both assets and stockholders’ equity. In a stock dividend, however no assets are distributed.
Thus a stock dividend causes no change in assets or in total stockholders’ equity. Each stockholder receives additional shares, but his or her percentage ownership in the corporation is no larger than before.
To illustrate this poirit, assume that a corporation with 2,000 shares of stock is owned’ equally by James Davis and Susan Miller, each owning 1,000 Shares of stock.
The corporation declares a stock dividend of 10% and distributes 200 additional shares (10% of 2,000 shares), with 100 shares going to each of the two stockholders. Davis and Miller now hold t, 100 shares apiece, but each still own” one-half of the business.
Furthermore the corporation has not changed, in size; its assets and liabilities and its total stockholders equity are exactly the same as before ‘the dividend.
Now let us consider the logical effect of this stock dividend on the market price of the company’s stock. Assume that before the stock dividend, the outstanding 2,000 shares in our example had a market price of $110 pet share.
This price indicates a total market value for the corporation of $220,000 (2,000 shares X $110 per share).
As the stock dividend does ‘not change total assets or total stockholders’ equity; the total market value of the corporation should remain $220,000 after the stock dividend.
As 2,200 shares are now outstanding, the market price of each, share should to $]00 ($220,000 + 2,200 shares). In short, the market value of the stock should fall in proportion to the number
of new shares issued: Whether the market price per share will fall in proportion to a small increase in number of outstanding shares is another matter. (In fact, market price often rises after the declaration of a stockinette.
Puzzling, but true.) Entries to record a Stock.Stock. Dividend In accounting for relatively small stock dividends (say, less than 20%), the market value of the new shares is transferred from the Retained Earnings accounts to the paid-in capital accounts. This process sometimes is called capitalizing retained earnings. The overall effect is the same as if the dividend had been
paid in cash, and the stockholders had immediately reinvested the cash in the business . in exchange for additional shares of stock. Of course, no cash actually changes hands the new shares of stock are sent directly to the stockholders.To illustrate, assume that on June I,Aspen Corporation has outstanding 100,000 shares of $S par value-common stock with a market value of $25 per share. On this date, the company declares ~ 10% stock dividend, distributable on’ July 15′ to stockholders of record on June 20. The entry at June I to record the declaration of this dividend is:
Retained Earnings 250,000 Stock Dividend to Be Distributed Additional Pald·ln Capila~ Stock Dividends Declared a 10% stock dividend consis (100,000 shares x 10%) of $5 par value common stock, market price $25 per share. ,Distributable July 15 to stockholders of record on ,June 20. Stack dividend declared; note 50,000 use of market price of stock 200,000
The Stock Dividend to Be Distributed account is not a liability, because there is no obligation to distribute cash or any other asset. If a balance sheet is prepared between the date of declaration of a stock dividend and the date of distribution of the shares, this account, as well as Additional Paid-in Capital: Stock Dividends, should be presented in the stockholders’ equity section of the balance sheet.
Notice that the, Retained Earnings account was reduced by the ‘market value of the shares to be issued ‘(10,000 shares x $25 per share = $250,000). Notice also that 110 change occurs’ in the total amount of stockholders’ equity The amount removed from tile Retained Earnings account was simply transferred into two other stockholders’ equity accounts.
On July, 15, the entry to record the distribution of the dividend shares is: Stock Dividen~ to Be Distributed 50,000 Stock dividend distributed , Common Stock 50,090 ‘oistributed 10,000 share stock dividend declared June’ 1. Reasons for Stock Dividends Although stock dividend’s cause 110 change in total assets, liabilities, or stockholders’ equity, they are popular both with management and with stockholders.
Management often finds stock dividends appealing because they allow management to distribute something of perceived value to stockholders’ while conserving cash, which may be needed for other purposes like expanding facilities and introducing new product lines Stockholders like stock dividends because they receive more shares, often the stock price does not fall proportionately, and the dividend is not subject to income taxes (until the shares received are sold).
Also, large stock dividends tend to keep the stock price down in a trading range that appeals to most investo~s.