Stock Dividends
and Stock Splits
Created in 2006
By Michael Worthington
Elizabeth City State University
Stock Dividends
Stock Dividends consist of additional
shares of _______________ issued to current
stockholders (instead of cash dividends)
Boards of Directors declare Stock
Dividends when their corporations earn
high profits, but have no available cash
because earnings have been reinvested
Amount of Stock Dividend
Stock Dividends are stated as a percentage
of outstanding shares
So a 10% Stock ____________ equals 10% of
the number of shares already outstanding
If 12,000 shares of stock were outstanding,
the 10% Stock Dividend would consist of
1,200 shares (10% of 12,000)
1
Laws of Supply and Demand
ALL _______ Dividends increase the supply
of stock, which decreases the price
Small stock dividends have only a minor
effect on prices, so the current stock price
is still used to value the stock dividend
Large stock dividends have a significant
effect on the price of stock, so the current
market value can NOT be used to value
large stock dividends – and the only
remaining choice is PAR or STATED VALUE
Reduction in the price due to an increase
in numbers of shares is called “dilution”
Size of Stock Dividends
Small Stock Dividends (less than 20%)
are valued at Market Value (current price)
Large Stock Dividends
(more than 25%) are
valued at Par Value or
Stated Value
Accountants must use professional
_____________ to decide if Stock Dividends
between 20% and 25% are small or large
Declaration of a
Stock Dividend
Debit:
“Dividends”
Credit:
“Stock Dividends to be Distributed”
“Stock Dividends to be Distributed”
is an Owners’ ______________ account
“Stock Dividends to be Distributed”
is NOT a liability because no cash
is due
2
Distribution of Stock Dividend
Debit:
“Stock Dividends to be Distributed”
Credit:
“Common Stock”
Credit (for small stock dividends):
“Capital in Excess of Par Value” too
Capitalization of Earnings
“Capitalization” means to record an amount on the
balance sheet
Retained Earnings
Transfer from
Retained Earnings
to Common Stock
Common
Stock
Stock dividends reduce Retained Earnings account,
increasing the ________ of the Common Stock account
So Stock Dividends are said to “capitalize earnings”
because an amount of earnings is transferred from
Retained Earnings to Common Stock
Stock Splits
Stock _______ increase the number of shares
while decreasing the value of each share
Stock Splits do NOT change the total value
of the corporation
Stock Splits do NOT require a journal entry
3
Example of a 2-for-1 stock split
If an investor owned 100 shares at $50 per
share, their ________________ would be worth
$5,000 before the split
After a 2-for-1 stock split, the investor would
own 200 (2 x 100) shares at $25 per share
($50 ÷ 2) still worth $5,000 after the split
Purpose of Stock Splits
Most companies retain some of their
earnings to reinvest in the business,
so corporations tend to grow
As corporations grow, their stock
prices generally ________ over time
Corporations use stock splits to
occasionally reduce the price per
share to make it easier for investors
to buy and sell their shares of stock
Similarities between Stock
Splits and Stock Dividends
Both Stock Dividends and Stock Splits
increase the number of _____________ and
reduce the price per share
Consider a corporation with 1,000 shares
of stock priced $10 per share
2-for-1 Stock Split would result in 2,000
shares valued at about $5 per share
100% Stock Dividend would result in 2,000
shares valued at about $5 per share
4
Difference between Stock
Splits and Stock Dividends
These two alternatives are used for
different purposes
Stock Dividends are used when
________________ earn profits but they have
no available money to pay cash dividends
Stock Splits are used to reduce the value
per share, when the price of the stock
has risen to a point that makes it difficult
for investors to buy and sell shares
DILUTION
Neither Stock Dividends or
Stock Splits affect the total value
More shares just
reduce the book value
of each share
Like cutting a pie into more pieces:
each piece is just a little smaller,
but the pie remains the same size
But investors think that a stock split
or stock dividend is a good __________,
so the stock price may actually rise
COMPARISON
Stock Dividends
Stock Splits
NO impact on value NO impact on value
Need Journal Entry NO Journal Entry
Reduction in
Retained Earnings
NO effect on
Retained Earnings
Increase Common
Stock account
NO effect on
Common Stock
5