Page 526 - Accounting Principles (A Business Perspective)

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• The board of directors of a corporation may wish to have more stockholders (who might then buy its
products) and eventually increase their number by increasing the number of shares outstanding. Some of the
stockholders receiving the stock dividend are likely to sell the shares to other persons.

• Stock dividends may silence stockholders' demands for cash dividends from a corporation that does not
have sufficient cash to pay cash dividends.
The percentage of shares issued determines whether a stock dividend is a small stock dividend or a large stock
dividend. Firms use different accounting treatments for each category.
Recording small stock dividends A stock dividend of less than 20 to 25 per cent of the outstanding shares is
a small stock dividend and has little effect on the market value (quoted market price) of the shares. Thus, the firm
accounts for the dividend at the current market value of the outstanding shares.

Assume a corporation is authorized to issue 20,000 shares of USD 100 par value common stock, of which 8,000
shares are outstanding. Its board of directors declares a 10 per cent stock dividend (800 shares). The quoted market
price of the stock is USD 125 per share immediately before the stock dividend is announced. Since the distribution
is less than 20 to 25 per cent of the outstanding shares, the dividend is accounted for at market value. The entry for
the declaration of the stock dividend on 2010 August 10, is:
Aug. 10 Retained earnings (or Stock Dividends) (800shares x $125) (-SE) 100,000
Stock dividend distributable – Common 80,000
(800 shares x $100) (+SE)
Paid-In capital – Stock dividends (+SE) 20,000
To record the declaration of a 10% stock dividend; shares to be
distributed on 2010 September 20, to stockholders of record on 2010
August 31.
This entry records the issuance of the shares:

Sept. 20 Stock dividends distributable – 80,000
Common (-SE)
Common stock (+SE) 80,000
To record the distribution of 800
shares of common stock as
authorized in stock dividends
declared on 2010 August 10.
The stock dividend distributable—common account is a stockholders' equity (paid-in capital) account
credited for the par or stated value of the shares distributable when recording the declaration of a stock dividend.
Since a stock dividend distributable is not to be paid with assets, it is not a liability. When a balance sheet is
prepared between the date the 10 per cent dividend is declared and the date the shares are issued, the proper
statement presentation of the effects of the stock dividend is:
Stockholders' equity:
Paid-in capital:
Common stock - $100 par value; authorized, $800,000
20,000 shares; issued and outstanding, 8,000
shares
Stock dividend distributable on 2010 80,000
September 20, 800 shares at par value
Total par value of shares issued and to be $880,000
issued
Paid-in capital 20,000
Total paid-in capital $900,000
Retained earnings 150,000
Total stockholders' equity $1,050,000

Accounting Principles: A Business Perspective 527 A Global Text