Question
In: Accounting
All dividends, except for stock dividends, reduce the total stockholders’ equity in the corporation. Why is...
All dividends, except for stock dividends, reduce the total stockholders’ equity in the corporation. Why is that? Explain. 1-2 sentences max
Solutions
Expert Solution
Answer—Its true that all dividends except Stock dividends reduce stockholder’s equity because in case of Stock dividends there is no cash outflow and the amount of decrease in retained earnings is same as increase in paid in capital from issue of shares.
.
Detailed explanation
In a cash dividend cash reduce and retained earnings decrease as dividend is paid out of retained earnings. The reduction in retained earnings reduce overall stockholder’s equity since retained earnings is a part of stockholder’s equity. When stock dividend is issued new shares are allotted to existing shareholders and the balance in paid in capital increase at the same the decrease in retained earnings take place due to dividend. Lets wrap this with an example given below
Say Stock dividend of $50000 is issued
|
Before Stock Dividend |
Stock Dividend |
After Stock Dividend |
|
|
Contributed Capital: |
|||
|
Common Stock |
$ 2,70,000.00 |
$ 50,000.00 |
$ 3,20,000.00 |
|
Additional paid in Capital |
$ 14,000.00 |
$ 14,000.00 |
|
|
Retained Earnings |
$ 85,000.00 |
$ (50,000.00) |
$ 35,000.00 |
|
Total Contributed Capital |
$ 3,69,000.00 |
$ - |
$ 3,69,000.00 |
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