Hampshire Plastering Services

When a company issues a stock dividend, it distributes additional shares of stock to existing shareholders. These shareholders do not have to pay income taxes on stock dividends when they receive them; instead, they are taxed when the investor sells them in the future. For example, in a 2-for-1 stock split, a shareholder with 100 shares priced at $50 each would end up with 200 shares priced at $25 each.

Can preferred shareholders receive stock dividends?

This would free bookkeeping courses make the following journal entry $150,000—calculated by multiplying 500,000 x 30% x $1—using the par value instead of the market price. For the company, a stock dividend is a pain-free way to issue dividends without depleting its cash reserves. The journal entry to distribute the soft drinks on January 14 decreases both the Property Dividends Payable account (debit) and the Cash account (credit).

What are Stock Dividends?

• Stock dividends represent a unique way for companies to reward their shareholders without expending cash.
• It adjusts retained earnings and increases paid-in capital without affecting total equity.
• In contrast, a corporation that has recently purchased many assets, but is unable to operate profitably, may have a market value that is less than its book value.
• Many of the legal requirements imposed on a corporation do not apply to sole proprietorships.
• This entry transfers the value of the issued stock from the retained earnings account to the paid-in capital account.

The total stockholders’ equity on the company’s balance sheet before and after the split remain the same. A reverse stock split occurs when a company attempts to increase the market price per share by reducing the number of shares of stock. For example, a 1-for-3 stock split is called a reverse split since it reduces the number of shares of stock outstanding by two-thirds and triples the par or stated value per share. A primary motivator of companies invoking reverse splits is to avoid being delisted and taken off a stock exchange for failure to maintain the exchange’s minimum share price.

Instead of using the fair market value, the company transfers the par value of the additional shares from retained earnings to the common stock account. For example, if a company with 1,000,000 shares outstanding declares a 30% stock dividend, it will issue 300,000 new shares. The par value of these shares is then moved from retained earnings to common stock.

Let us consider the accounting treatment for small and large stock dividends with the help of two simple working examples. The first step in accounting for stock dividends is to categorize the stock dividends into small stock or large stock dividends. The record books should reflect the dividends announced irrespective of the payment date that is set for a later date usually. When a company issues new shares in proportion of more than 25% to the previously held shares, it is determined as a large stock dividend. Although, the duration between dividend declared and paid is usually not long, it is still important to make the two separate journal entries.

Instead of using market value, companies record the transaction at a par value only, with the full amount transferred from retained earnings to common stock. Unlike cash dividends, stock dividends don’t reduce a company’s assets. However, they do change its equity structure, which impacts financial reporting. A stock split is much like a large stock dividend in that both are large enough to cause a change in the market price of the stock.

Stock dividend vs. cash dividend

As a stock dividend represents an increase in common stock without any receipt of cash, it is recognized by debiting retained earnings and crediting common stock. The amount at which retained earnings is debited depends on the level of stock dividend, i.e. whether is a small stock dividend or a large stock dividend. Declaration date is the date that the board of directors declares the dividend to be paid to shareholders. It is the date that the company commits to the legal obligation of paying dividend.

This is due to when the company issues the large stock dividend, the value assigned to the dividend is the par value of the common stock, not the market price. On the distribution date of the stock dividend, the company can make the journal entry by debiting the common stock dividend distributable account and crediting the common stock account. In this case, if the company issues stock dividends less than 20% to 25% of its total common stocks, the market price is used to assign the value to the dividend issued.

• The first step in accounting for stock dividends is to categorize the stock dividends into small stock or large stock dividends.
• If a corporation purchases a significant amount of its own stock, the corporation’s earnings per share may increase because there are fewer shares outstanding.
• If we compare stock dividends with cash dividends, the former is the issuance of additional shares to the existing shareholders.
• The balance sheet reports the assets, liabilities, and owner’s (stockholders’) equity at a specific point in time, such as December 31.

4.4 Stock dividends and stock splits

For the investor, stock dividends offer no immediate payoff but may increase in value over time. Of course, the investor can simply sell the extra shares and collect the cash. A stock dividend is a reward for shareholders made in additional shares instead of cash.

A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account. Liabilities also include amounts received in advance for a future sale or for a future service to be performed. Accumulated other comprehensive income refers to several items that were not included in net income and retained earnings. Examples include foreign currency translation adjustments and unrealized gains and losses on hedge/derivative financial instruments and postretirement benefit plans.

Stock Issued for Other Than Cash

This is especially so when the two dates are in the different account period. Dividends, whether in cash or in stock, are the shareholders’ cut of the company’s profit. A company may issue a stock dividend rather than cash if it doesn’t want to deplete its depreciation strategies under the new tax law cash reserves. However, it’s not a good look for a company to abruptly stop paying dividends or pay less in dividends than in the past.

Pros and Cons for Companies and Investors

On the payment date, the company debits Dividends Payable and credits Cash, thereby settling the liability and reducing the cash balance. Accurate timing and recording of these entries are essential to ensure that financial statements reflect the company’s financial position and cash flows correctly. While stock dividends and stock splits standard cost variance analysis- how it’s done and why may seem similar, they have distinct differences in their impact on a company’s financial structure and shareholder value. A stock dividend involves issuing additional shares to existing shareholders, which affects the equity accounts but not the total equity.

There are two types of stock dividends—small stock dividends and large stock dividends. The key difference is that small dividends are recorded at market value and large dividends are recorded at the stated or par value. For corporations, there are several reasons to consider sharing some of their earnings with investors in the form of dividends. Many investors view a dividend payment as a sign of a company’s financial health and are more likely to purchase its stock. In addition, corporations use dividends as a marketing tool to remind investors that their stock is a profit generator. Generally these omitted dividends were not declared and, therefore, do not appear on the corporation’s balance sheet as a liability.