6.7: Stock Dividends

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Stock dividends are corporate earnings that are distributed to stockholders. They are distributions of retained earnings, which is accumulated profit. With a stock dividend, stockholders receive additional shares of stock instead of cash. Stock dividends transfer value from Retained Earnings to the Common Stock and Paid-in Capital in Excess of Par – Common Stock accounts, which increases total paid-in capital.

Stock Dividends is a contra stockholders’ equity account that temporarily substitutes for a debit to the Retained Earnings account. At the end of the accounting period, Stock Dividends is closed to Retained Earnings.

Stock dividends are only declared on shares outstanding, not on treasury stock shares.

Three dates are associated with a stock dividend. The date of declaration is the date the corporation commits to distributing additional shares to stockholders. On that date, the stockholders’ equity account Stock Dividends Distributable is used to record the value of the shares due to the stockholders until the shares are distributed. The date of record is the date on which ownership is determined. Since shares of stock may be traded, the corporation names a specific date, and whoever owns the shares on that date will receive the dividend. There is no journal entry on the date of record. Finally, the date of distribution is the date the shares are actually distributed to stockholders.

Declared a 2% stock dividend on 21,000 shares of $10 par common stock outstanding. The fair market value is $15 per share.

	Account	Debit	Credit
▲	Stock Dividends	6,300		21,000 x 2% x $15 (fair market value)
▲	Stock Dividends Distributable		4,200	21,000 x 2% x $10 (par value)
▲	Paid-in Capital in Excess of Par - Common Stock		2,100	21,000 x 2% x $5 (premium)

▲ Stock Dividends is a contra stockholders’ equity account that is increasing.

▲ Stock Dividends Distributable is a stockholders’ equity account that is increasing.

Stock Dividends is calculated by multiplying the number of additional shares to be distributed by the fair market value of each share.

Stock Dividends Distributable is a stockholders’ equity account that substitutes for Common Stock until the stock can be issued. Stock Dividends Distributable can only be in multiples of par, just like Common Stock: the number of shares in the stock dividend times the par value per share.

Paid-in Capital in Excess of Par - Common Stock is used for any amount above par.

Date of Record - no journal entry

Issued the stock certificates. The Stock Dividends Distributable account balance is set to zero.

	Account	Debit	Credit
▼	Stock Dividends Distributable	4,200		21,000 x 2% x $10 (par value)
▲	Common Stock		4,200

▼ Stock Dividends Distributable is a stockholders’ equity account that is decreasing.

▲ Common Stock is a stockholders’ equity account that is increasing.

Stock Dividends Distributable is debited (zeroed out) when dividends are distributed and Common Stock is credited.

Note

Many times the challenge with stock dividend declarations is to first determine the number of shares outstanding.

For example, if a company issued 30,000 share of common stock, reacquired 10,000 as Treasury Stock, and then sold 1,000 shares of the Treasury Stock, there would be 21,000 shares outstanding (30,000 - 10,000 + 1,000). If a 2% stock dividend is declared, there would be 420 additional shares issued (21,000 x 2%).