Stock dividend accounting
/What is a Stock Dividend?
A stock dividend is the issuance by a corporation of its common stock to shareholders without any consideration. This issuance may arise when the board of directors does not have sufficient cash on hand to issue a cash dividend to shareholders, and so resorts to a "paper" distribution of additional shares to shareholders. However, this has no impact on the actual received income of shareholders, since they will still own the same percentage of the issuing business.
What is the Accounting for Stock Dividends?
If a corporation issues less than 25 percent of the total amount of the number of previously outstanding shares to shareholders, the transaction is accounted for as a stock dividend. If the issuance is for a greater proportion of the previously outstanding shares, the transaction is instead accounted for as a stock split.
A stock dividend is never treated as a liability of the issuer, since the issuance does not reduce assets. Consequently, this type of dividend cannot realistically be considered a distribution of assets to shareholders.
When there is a stock dividend, the related accounting is to transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. This fair value is based on their market value after the dividend is declared.
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Example of Stock Dividend Accounting
Davidson Motors declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1.00. Davidson records the following entry:
| Debit | Credit | |
| Retained earnings | 50,000 | |
| Common stock, $1 par value | 10,000 | |
| Additional paid-in capital | 40,000 |