JournaldrillStock dividend
A stock dividend moves retained earnings into paid-in capital with no cash. A small stock dividend (under about 20 to 25% of shares) is recorded at market value: debit Retained Earnings, credit Common Stock Dividend Distributable at par and Paid-in Capital in Excess of Par for the rest. A large one is recorded at par.
Syntax
Small: Dr Retained Earnings (shares x market) / Cr Common Stock Dividend Distributable (shares x par), Cr Paid-in Capital in Excess of Par; Large: Dr Retained Earnings (shares x par) / Cr Common Stock Dividend Distributable| Part | What it is |
|---|---|
Common Stock Dividend Distributable | Equity account (not a liability) holding par value of shares to be issued; closed to Common Stock on distribution. |
Small stock dividend | Less than 20 to 25% of outstanding shares; capitalized at fair market value. |
Large stock dividend | More than 20 to 25%; capitalized at par (or stated) value. |
Stock split | Increases shares and reduces par proportionally; memo note only, no journal entry. |
Examples
Declaration: Dr Retained Earnings 120,000 / Cr Common Stock Dividend Distributable 10,000, Cr Paid-in Capital in Excess of Par 110,000Result: Total equity unchanged; retained earnings down 120,000, paid-in capital up 120,000
10% dividend on 100,000 shares of 1 par stock trading at 12: 10,000 shares x 12.
Distribution: Dr Common Stock Dividend Distributable 10,000 / Cr Common Stock 10,000Result: 10,000 new shares issued
Entry when the shares are actually distributed.
Dr Retained Earnings 50,000 / Cr Common Stock Dividend Distributable 50,000Result: Large dividend recorded at par
50% dividend on 100,000 shares of 1 par: 50,000 shares x 1.
2-for-1 stock split: no journal entryResult: 200,000 shares of 0.50 par replace 100,000 shares of 1 par; Common Stock stays 100,000
Only a memorandum note in the records.
Common mistakes
- Reporting Common Stock Dividend Distributable as a liability: it is paid in shares, not assets, so it belongs in stockholders' equity.
- Using market value for a large stock dividend: large dividends are recorded at par because the share price drops substantially.
- Making a journal entry for a stock split: a split changes the number and par of shares, not any account balance.
Practice Stock dividend
These drills check your answer on live data, free, no account needed.
- Small stock dividendOrchard Lane Foods Inc. has 80,000 shares of $2 par value common stock outstanding. The board declares a 10% stock dividend when the market price is $15 per share. Record the declaration.
Questions
Does a stock dividend affect total equity?
No. It reclassifies amounts from retained earnings to paid-in capital; total stockholders' equity and total assets are unchanged.
What is the difference between a stock dividend and a stock split?
A stock dividend is recorded by moving retained earnings into paid-in capital. A stock split only changes the number of shares and the par value per share with no entry.
Related
- Cash dividendHow to record a cash dividend: Dr Dividends, Cr Dividends Payable on declaration; Dr Dividends Payable, Cr Cash on payment; nothing on the record date.
- Retained earningsWhat retained earnings are, how net income and dividends change them, the closing entries that post to the account, the formula and what a deficit means.
- Issuing stockHow to record a stock issue: Dr Cash, Cr Common Stock at par and Cr Paid-in Capital in Excess of Par. No-par shares, preferred stock and stock for assets.
- Treasury stockHow to record share buybacks under the cost method: Dr Treasury Stock, Cr Cash. Reissuing above cost credits Paid-in Capital from Treasury Stock.