Financial Management

Posted: October 17th, 2013

Financial Management

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Financial Management

A stock dividend is another way of issuing more shares to customers in case the price of the shares rises to high, where it becomes hard to sell the shares. Company decides to increase the number of shares by a certain percentage, where a percentage below 20-25 is considered small stock dividend while one above the range is considered a large stock dividend. Therefore, when a stock dividend is announced, each of the shareholders get an increase of their shares by the percentage set out by the board of governors. This is usually done to give the shareholders something other than cash, especially when the company does not wish to part with cash. However, after the stock dividends are issued, the price of the shares has to reduce (Accounting Coach, 2012).

Unlike in a split stock, there has to be a journal entry with stock dividends where the value of the new shares is transferred from the retained earnings to the paid-in-capital section. The amount that is transferred depends on whether it was a large or small dividend. For a small stock dividend, on the declaration date, the market value of the new shares will be transferred to paid-in-capital of the balance sheet. This happens as illustrated in the case of Brimstone Tire Company (accounting.utep.edu, 2006).

New shares issued == 2,000,000 ×10

100

== 200,000 new shares

Value of the new shares at market value = 200,000 × $20

= $ 4,000,000

At par value                                             =200,000 × $10

= $2,000,000

The journal entry would be as follows after the declaration

Account                                                          debit                            credit

Retained earnings                                       $ 4,000,000

Common stock dividend distributable                                        $ 2,000,000

Paid-in-capital in excess of par                                                   $ 2,000,000

After distribution of the new shares to the stockholders, a journal entry will be made as follows

Account                                                          Debit                           credit

Common stock distributable                       $ 2,000,000

Common stock                                                                              $ 2,000,000

The results will be reflected in the balance sheet as follows

Common stock (2.2 million shares at $10 par)                     $ 22,000,000

Capital in excess of par                                                         $19,000,000

Retained earnings ((33.0 + 70.0 – 4.0) million)                   $ 99,000,000

Total equity                                                                         $ 140,000,000

After the stock shares are issued, the equity of the company remains the same since nothing changes except a transfer of the new shares value from the retained earnings to the paid-in-capital section of the balance sheet.

References

Accounting Coach. (2012). Stock Splits and Stock Dividends. Retrieved from http://www.accountingcoach.com/online-accounting-course/17Xpg05.html#stock-splits-dividends

accounting.utep.edu. (2006). Chapter 18 Shareholders’ Equity. Retrieved from http://accounting.utep.edu/sglandon/c18/c18c.pdf