Small Stock Dividend

If the stock dividend is less than 20-25%, it is a small stock dividend and is accounted for by the journal entries explained below:

• At the time of declaration, retained earnings is debited by the amount equal to the product of the share's market price, the stock dividend percentage and the current number of shares outstanding; and stock dividends distributable is credited by the same amount.

• At the time of issuance of stock the stock dividends distributable is debited by the full amount, common stock is credited by amount equal to the product of par value per share, stock dividend percentage and the number of current shares outstanding. Any excess of stock dividends distributable over the amount credited to common stock is credit to additional paid-in capital.

Large Stock Dividend

If the stock dividend declared is more than 20%-25%, it is a large stock dividend and is more like a stock split. In this case, declaration is recorded by debiting retained earnings by the product of par value per share, percentage of stock dividend and number of outstanding shares; and crediting stock dividends distributable. At the time of issuance, the stock dividends distributable are debited and common stock is credited.

Example

A company has 200,000 outstanding shares of common stock of $10 par value. It declares 10% stock dividend. The market price per share of common stock was $15 on the date of declaration.

Record the declaration and payment of the stock dividend using journal entries.

Solution

Journal entry on the date of declaration:

Retained Earnings	300,000
Stock Dividends Distributable		300,000

Journal entry on the date of distribution:

Stock Dividends Distributable	300,000
Common Stock		200,000
Addition Paid-In Capital		100,000

Stock Splits

Stock split is the issuance of additional shares by a company to its shareholders without receiving any related contribution from them. Such an issue increases the number of shares issued and outstanding without increasing the total balance of common stock and market capitalization of the company. The effect of stock split is to split the par value and market price per share. In fact, the sole purpose of the stock split is to reduce the market price per share so as to make it more attractive for investors.

Stock splits are designed by companies in regard to their intended effect on the market price. If a company wants to reduce its market price to half it will issue 2-for-1 stock split which means the company shall issue addition 1 share per 1 share currently issued and outstanding thereby doubling the total number of shares. There might be a 3-for-2 stock split, for example, which means that 3 shares are to be issued for each 2 shares of currently issues shares.

Stock split has no effect on balance of any equity account. It just increases the number of shares and reduces par value.