Question

WE COMPANY declares a 10% stock dividend at the current market price P80/share. The following are the details of MY COMPANY stockholders section:

Preferred Stock P    500,000.00
Common Stock (100,000 shares at P50 par)    5,000,000.00
Paid-in Capital in Excess of Par    2,000,000.00
Retained Earnings    1,000,000.00
Total Stockholders’ Equity    8,500,000.00

WE COMPANY want to know the effect of stock dividends on its Financial Statement. The company hire you as a financial consultant to explain to the BOD the effect of this undertaking.

Answer 1

Stock dividend is an option under which the existing share holders are issued additional shares at existing market price.

Due to stock dividend the overall financial statements will remain unchanged.

The total stock holder's equity will also remaing unchanged.

There will be tranfer of amounts among accounts constituting total share holder's equity, i.e there will be a decrease in retained earnings and a coressponding increase in commonstock account and paid in capital in excess of par.

In the given situaltion 10% stock dividend is given.

=> 100,000 *10% =>10,000 new shares will be issued @P80 per share.

=> retained earnings will reduce by P80*10,000 =>P800,000.

common stock account will increase by P50 par value *10,000 shares =.P500,000.

paid in capital in excess of par will increase by difference in market price and par value (P 80-P50) *10,000

=>P30*100,000 =>P300,000.

the following wll be the stockholders section after stock dividend:

Preferred stock	P500,000
common stock (100,000 +10,000 share)*P50	P5,500,000
paid in capital in excess of par (2,000,000+300,000)	P2,300,000
retained earnings (1,000,000 - 800,000 worth stock dividend)	P200,000
Total stock holders equity	P8,500,000

It can be seen that there is no change in total share holder's equity due to stock dividend.