This Article describes both cash and stock dividend transactions.



Cash Dividends

The board of directors makes the decision to issue cash dividends, which entails more than just weighing the quantities of retained profits and cash. The board of directors, for example, may choose to keep the funds to invest in the corporation's development, handle crises, capitalize on unforeseen possibilities, or pay off debt. Alternatively, many corporations give monthly cash dividends to their stockholders. These cash flows provide a return to investors and usually always affect the market value of the stock.
Cash Dividend Accounting Dividend payment requires three key dates: proclamation, recording, and payment. The date of declaration is the day on which the board of directors’ votes to declare and pay a dividend. This makes the corporation legally liable to its investors. The date of record is the future date set by the board for identifying investors identified in the corporation's records who are eligible to receive dividends. The date of record is normally at least two weeks after the date of declaration. Dividends are paid to stockholders on the record date. The date of payment is the day on which the company makes payment; it is enough time after the date of record to allow the corporation to arrange cheques, money transfers, or other means of payment to pay dividends.
To illustrate, the entry to record a January 9 declaration of a $1 per share cash dividend by the directors of Z-Tech, Inc., with 5,000 outstanding shares is
- Date of Declaration
5,000Retained EarningsJan. 9 
5,000Common Dividend Payable     
Declared $1 per common share cash dividend
Common Dividend Payable is a current liability. The date of record for the Z-Tech dividend is January 22. No formal journal entry is needed on the date of record. The February 1 date of payment requires an entry to record both the settlement of the liability and the reduction of the cash balance, as follows:
- Date of Payment
5,000Common Dividend PayableFeb.1
Paid $1 per common share cash dividend

Cash Dividends and Deficits A corporation with a negative (abnormal) balance for retained earnings has a retained earnings deficit, which occurs when a company incurs cumulative losses and/or pays more dividends than total earnings from current and preceding years. Exhibit 13.6 shows how a deficit is shown on the balance sheet as a deduction. Most jurisdictions make it illegal for a business with a deficit to issue a cash dividend to its owners. This legislative provision is intended to safeguard creditors by prohibiting the distribution of assets to stockholders while the company is in financial trouble.

Total AmountDescription
50,000Common stock—$10 par value, 5,000 shares authorized, issued, and outstanding
(6,000)Retained earnings deficit
44,000Total stockholders’ equity
Some state laws permit the payment of cash dividends by repaying a portion of the money invested by investors. This is known as a liquidation cash dividend, or simply a liquidating dividend, since it returns a portion of the initial investment to owners. At the declaration date, this necessitates a debit entry to one of the contributed capital accounts rather than Retained Earnings.

Stock Dividends

A stock dividend declared by a corporation's board of directors is a distribution of extra shares of the corporation's own stock to its owners in exchange for no payment. Stock dividends and cash dividends are not the same thing. A stock dividend does not lower assets or equity; rather, it transfers equity from retained earnings to contributed capital.

Reasons for Stock Dividends Dividends on stock exist for at least two reasons. First, directors are supposed to employ stock dividends to maintain the company's market price affordable. For example, if a company continues to produce money but does not pay out cash dividends, the value of its common stock will certainly rise. The price of such a stock may rise to the point that it discourages some investors from purchasing it (especially in lots of 100 and 1,000). A stock dividend increases the number of outstanding shares while decreasing the per share stock price. Another motivation for a stock dividend is to demonstrate management's belief that the firm is performing well and will continue to perform well.

Accounting for Stock Dividends A stock dividend affects the components of equity by transferring part of retained earnings to contributed capital accounts, capitalizing retained earnings is a term that is used sometimes. Accounting for a stock dividend differs depending on whether it is little or huge. A tiny stock dividend is defined as a payment of 25% or less of previously outstanding shares. It is calculated by capitalizing retained earnings for the market value of the shares to be distributed. A substantial stock dividend is one that distributes more than 25% of previously outstanding shares. A substantial stock dividend is calculated by capitalizing retained earnings for the minimum amount needed by the corporation's state legislation. Most states require capitalization retained earnings equal to the stock's par or declared value.

To illustrate stock dividends, we use the equity section of Quest’s balance sheet shown in Exhibit 13.7 just before its declaration of a stock dividend on December 31.
Total AmountDescription
 (before dividend) Stockholders’ Equity
100,000Common stock—$10 par value, 15,000 shares authorized, 10,000 shares issued and outstanding
8,000Paid-in capital in excess of par value, common stock
35,000Retained earnings
143,000Total stockholders’ equity
A small stock dividend is being recorded. Assume Quest's board of directors declares a 10% stock dividend on December 31. This $1,000 stock dividend, calculated as 10% of its 10,000 issued and outstanding shares, will be given on January 20 to stockholders of record on January 15. Because the market price of Quest's stock on December 31 is $15 per share, the following minor stock dividend declaration is recorded:
-Date of Declaration—Small Stock Dividend
15,000Retained EarningsDec. 31
 Common Stock Dividend Distributable
Paid-In Capital in Excess of Par Value, Common Stock
Declared a 1,000-share (10%) stock dividend.
The $10,000 credit in the declaration entry equals the par value of the shares and is recorded in Common Stock Dividend Distributable, an equity account. Its balance exists only until the shares are issued. The $5,000 credit equals the amount by which market value exceeds par value. This amount increases the Paid-In Capital in Excess of Par Value account in anticipation of the issuance of shares. In general, the balance sheet changes in three ways when a stock dividend is declared. First, the amount of equity attributed to common stock increases. for Quest, from $100,000 to $110,000 for 1,000 additional declared shares. Second, paid-in capital in excess of par increases by the excess of market value over par value for the declared shares. Third, retained earnings decreases, reflecting the transfer of amounts to both common stock and paid-in capital in excess of par. The stockholders’ equity of Quest is shown in Exhibit 13.8 after its 10% stock dividend is declared on December 31—the items impacted are in bold.
Total AmountDescription
 (after dividend) Stockholders’ Equity

Common stock—$10 par value, 15,000 shares authorized, 
 10,000 shares issued and outstanding
Common stock dividend distributable—1,000 shares
Paid-in capital in excess of par value, common stock 
20,000Retained earnings
143,000Total stockholders’ equity
No entry is made on the date of record for a stock dividend. On January 20, the date of payment, Quest distributes the new shares to stockholders and records this entry:
 - Date of Payment—Small Stock Dividend
10,000Common Stock Dividend DistributableJan. 20
10,000Common Stock, $10 Par Value
o record issuance of common stock dividend.
The sum of these stock dividend entries is $15,000 in retained profits transferred (or capitalized) to paid-in capital accounts. The amount of retained earnings capitalized equals the market value of 1,000 issued shares ($15 * 1,000 shares). Individual stockholders' stakeholder percentages are unaffected by a stock dividend.
Recording a large stock dividend. A corporation capitalizes retained earnings up to the state law minimum for a substantial stock dividend. This number is the par or stated value of freshly issued shares in most states. As an example, assume Quest's board of directors declares a 30% stock dividend instead of a 10% dividend on December 31. Because this payout is greater than 25%, it is classified as a substantial stock dividend. As a result, the par value of the 3,000 dividend shares is capitalized with this entry on the day of declaration:
30,000Retained EarningsDec. 31
30,000Common Stock Dividend Distributable
Declared a 3,000-share (30%) stock dividend
This transaction decreases retained earnings and increases contributed capital by $30,000. On the date of payment, the company debits Common Stock Dividend Distributable and credits Common Stock for $30,000. The effects from a large stock dividend on balance sheet accounts are similar to those for a small stock dividend except for the absence of any effect on paid-in capital in excess of par.

Stock Splits

A stock split is the distribution of extra shares to stockholders in proportion to their ownership percentage. When a stock split happens, the firm "calls in" its outstanding shares and issues multiple new shares for each old share. Splits are possible in any ratio, including 2-for-1, 3-for-1, and greater. Stock splits lower the stated or par value per share. Stock splits are motivated in the same way that stock dividends are.

To illustrate, Comp Tec has 100,000 outstanding shares of $20 par value common stock with a current market value of $88 per share. A 2-for-1 stock split cuts par value in half as it replaces 100,000 shares of $20 par value stock with 200,000 shares of $10 par value stock. Market value is reduced from $88 per share to about $44 per share. The split does not affect any equity amounts reported on the balance sheet or any individual stockholder’s percent ownership. Both the Paid-In Capital and Retained Earnings accounts are unchanged by a split, and no journal entry is made. The only effect on the accounts is a change in the stock account description. Comp Tec’s 2-for-1 split on its $20 par value stock means that after the split, it changes its stock account title to Common Stock, $10 Par Value. This stock’s description on the balance sheet also changes to reflect the additional authorized, issued, and outstanding shares and the new par value.

The distinction between stock splits and huge stock dividends is frequently muddled. Many businesses declare stock splits in their financial accounts without calling in the original shares, just modifying their par value. This form of "split" is actually a substantial stock dividend, with more shares distributed to owners as a consequence of capitalization retained earnings or converting other paid-in capital to Common Stock. This method avoids the administrative expenditures of stock splitting. Harley-Davidson has announced a 2-for-1 stock split in the form of a 100% stock dividend.

Resources : fundamental accounting principles 20th edition (pdf) John J. Wild , Ken W. Shaw Barbara Chiappetta
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