Describe the journal entry for a stock dividend on common stock (which has a par value)....

Describe the journal entry for a stock dividend on common stock (which has a par value). Be sure to address the difference between a small and large stock dividend with regard to amounts used to adjust retained earnings. Since you are describing the journal entry, remember to address what accounts are used and any corresponding debits and credits.

Expert Solution

Stock Dividends

A stock dividend does not involve cash. Rather, it is the distribution of more shares of the corporation's stock. Perhaps a corporation does not want to part with its cash, but wants to give something to its stockholders. If the board of directors approves a 10% stock dividend, each stockholder will get an additional share for each 10 shares held.

Since every stockholder received additional shares, and since the corporation is no better off after the stock dividend, the value of each share should decrease. In other words, since the corporation is the same before and after the stock dividend, the total market value of the corporation remains the same. Because there are 10% more shares outstanding, however, each share should drop in value. With each stockholder receiving a percentage of the additional shares and the market value of each share decreasing in value, each stockholder should end up with the same total market value as before the stock dividend. (If this reminds you of a stock split, you are very perceptive. A stockholder of 100 shares would end up with 150 shares whether it were a 50% stock dividend or a 3-for-2 stock split. However, there will be a difference in the accounting.)

Even though the total amount of stockholders' equity remains the same, a stock dividend requires a journal entry to transfer an amount from the retained earnings section of the balance sheet to the paid-in capital section of the balance sheet. The amount transferred depends on whether the stock dividend is (1) a small stock dividend, or (2) a large stock dividend.

Small stock dividend. A stock dividend is considered to be small if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend.

On the declaration date of a small stock dividend, a journal entry is made to transfer the market value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.

To illustrate, let's assume a corporation has 2,000 shares of common stock outstanding when it declares a 5% stock dividend. This means that 100 (2,000 shares times 5%) new shares of stock will be issued to existing stockholders. Assuming the stock has a par value of $0.10 per share and a market value of $12 per share on the declaration date, the following entry is made on the declaration date:

When the 100 shares are distributed to the stockholders, the following journal entry is made:
Large stock dividend. A stock dividend is considered to be large if the new shares being issued are more than 20-25% of the total value of shares outstanding prior to the stock dividend.

On the declaration date of a large stock dividend, a journal entry is made to transfer the par value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.

To illustrate, let's assume a corporation has 2,000 shares of common stock outstanding when it declares a 50% stock dividend. This means that 1,000 new shares of stock will be issued to existing stockholders. The stock has a par value of $0.10 per share and the stock has a market value of $12 per share on the declaration date. The following entry should be made on the declaration date:

When the 1,000 shares are distributed to the stockholders, the following journal entry should be made:

ekkarill92 answered 1 year ago

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