Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

12. Stockholders' Equity

Stock Dividends

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So instead of paying a cash dividend, a company can pay a stock dividend instead. So stock dividend, what it's going to give shareholders additional shares of stock right up to this point, we've talked about cash dividends where they receive cash. Well now they're gonna receive extra stock. Okay? So stock dividends, what we're gonna see is they're gonna just redistribute they're just a redistribution of equity. Okay? So we're gonna be taking as we're used to we're going to be reducing our retained earnings right with the dividends. The dividends come out of retained earnings. Well, same thing with the stock dividend except now, instead of paying it out in cash, well, we're gonna see it's gonna be common stock and additional paid in capital that get affected. So when we do a stock dividend, we're gonna use the current market price of the stock, the current market price of the stock to redistribute retained earnings. Okay? And we're gonna use this market price. It's gonna have to be given to you in the question. They're gonna have to tell you what that market prices. So stock dividends are taken from retained earnings, just like I said, and that's similar to cash dividends, right? We saw that we would uh when we when we show our retained earnings account, we have beginning retained earnings plus our net income minus our dividends gets us to our ending retained earnings. Well these dividends come out of retained earnings the same. Except we're not crediting cash. Now, we're gonna be crediting common stock and a pick instead. Okay. So let's go ahead and see this example, How do we deal with stock dividends? So stock dividends are going to be declared as a percentage of the outstanding common stock. They're gonna say, Okay, we're gonna have a 10% stock dividend, 20% stock dividend, something like that. Okay. And here we're focused on small stock dividends. Okay. Small stock dividends because there's different accounting for large stock dividends that we're not going to get into in this class. So small stock dividends is less than less than 20%. We're gonna say it's usually between 20 to 25% is a small stock dividend. Okay, so the apartment depot declared a stock dividend of 10% on its common stock. Currently the com the company has 100 and 50,000 shares of common stock outstanding with a par value of 50 cents. The current market price of the stock is $25. So like I said, they're gonna give you a market price in the problem and we have to find out what is the amount of the stock dividend. Right. The first thing they do is they tell us a percentage, the 10% is a percentage of the total outstanding shares at this point. So there's 100 and 50,000 outstanding chairs. And we multiply that by the 10%, equals 15,000 shares. Okay, so the dividend Is going to be 15,000 additional shares that are going to be given out to the stockholders. Okay, so we are going to create 15,000 more shares and they're going to go to the stockholders proportionally. Okay, so these 15,000 shares, what is their market value? That's what we need to do. And that's what we're going to reduce our retained earnings by that market value. So the 15,000 shares, which is the dividend Times the market value of $25, this tells us the total amount of the stock dividend in a dollar amount. Okay, So 15,000 times the $25 market price that comes out to $375,000. Okay. So now we need to um do our journal entry and the hard part is pretty much done. We have one more calculation to do, but let's set up the journal entry. This is what it's always gonna look like. First, we're gonna reduce our retained earnings And that's gonna be by the total amount of the stock dividend. 375,000. Okay. And then we're gonna have the credits to common stock and a pick. Remember that The common stock account only holds the par value, right? The par value of this stock is going into the common stock account. Everything else is additional paid in capital. So what we have here, we had 15,000 shares, right? The stock dividend was 15,000 shares times the 50 cent par value. They told us a par value of 50 cents in the question, Times 50 cents that comes out to 7500 in par value. Right? The par value of the stock dividend is 7500 the rest of it is additional paid in capital. So the common stock is gonna be 7500 are a pick is gonna be whatever makes this balance. So 375,000 pick equals 375,000 total dividend minus 7500. That is the par value. And that will give us our stock dividend. So the rest of it is 367,500. So 367,500 goes to a pick. And that's all there is to it when it comes to a stock dividend notice, nothing got touched here except for equity accounts, right, retained earnings, common stock and apec so there was a couple steps we went through first, we figured out the the number of shares, right? The number of shares in the stock dividend, based on the percentage of the stock dividend and the total shares outstanding. Then using that those shares, we found the total amount, using the market price right? Using this market price right here and that was the total amount that comes out of retained earnings. Using the shares of the dividend plus are multiplied by the par value, gave us the common stock amount and then, apec was whatever was left over, right, So that's about it here. For stock dividends, let's go ahead and fill out this little table at the bottom. Let me get out of the way because everything has to do with equity here are retained earnings went down by 375,000, but our common stock c stock Went up by 7500 and are a pick went up by 367,, so everything stayed balanced here, right. Everything was just a redistribution of equity, retained earnings went down, but our common stock and a pick went up in the same amount. Okay, so why don't we stop here and you guys try a stock dividend question down below.

You own 200 shares of the 100,000 outstanding shares of Big Company. Big Company declared a stock dividend of 5% when the market price per share was $55. Which of the following is true?