Question

8) Our company did a stock dividend. Dave says there is no effect on our comprehensive stockholders' equity at all. Barbara disagrees and says it does have an effect on equity but isn't sure exactly what. She just knows there is an impact. Verna has absolutely no clue on this one. So she just cannot decide who's right and is completely lost.

• Exactly what effect(s) would there be on the comprehensive stockholders' equity? Make sure you explain why.

Answer 1

A stock dividend is a pro rata distribution to stockholders of the corporation’s own stock. A company issues shares of stock in a stock dividend. A stock dividend results in a decrease in retained earnings and an increase in paid in capital. A stock dividend does not decrease total stockholders’ equity or total assets.

Example:

Suppose Mr. B has 100 shares of ABC Co. out of its total shares 1,000, i.e. he owns 10% shares of ABC Co. If ABC Corp. declares a 10% stock dividend, it would issue 100 shares (1,000 x 10%) of stock. Mr. B will receive 10% of 100 i.e. 10 shares as stock dividend. After stock dividend, Mr. B owns 110 shares but his ownership interest remains the same as before. Now he owns 110 shares out of 1,100 shares of ABC CO. i.e. 10% shares as before

Effects of stock dividend

Due to stock dividend, composition of stockholders’ equity changes since a portion of retained earnings is transferred to paid in capital. Total stockholders’ equity does not change. Par or stated value per share remains the same. Number of outstanding shares increases but book value per share decreases. Effects of stock dividend can be understood with the help of the following hypothetical table:

	Before dividend	After dividend
Stockholders’ equity
Paid in capital
Common stock, $10 par value	10,000,000	11,000,000
Paid in capital in excess of par value	0	1,000,000
Total paid in capital	10,000,000	12,000,000
Retained earnings	5,000,000	3,000,000
Total stockholders’ equity (i)	15,000,000	15,000,000
Number of outstanding shares (ii)	1,000,000	1,100,000
Book value per share (i)/(ii)	$15	$13.63

Thus due to stock dividend, comprehensive stockholders' equity does not change.