Stock Dividends

It is also known as “scrip dividend”. A stock dividend does not involve cash. Rather, it is the
distribution of more shares of the corporation's stock. Perhaps a corporation does not want to
part with its cash, but wants to give something to its stockholders. If the board of directors
approves a 10% stock dividend, each stockholder will get an additional share for each 10
shares held.

Since every stockholder received additional shares, and since the corporation is no better off
after the stock dividend, the value of each share should decrease. In other words, since the
corporation is the same before and after the stock dividend, the total market value of the
corporation remains the same. Because there are 10% more shares outstanding, however,
each share should drop in value. With each stockholder receiving a percentage of the
additional shares and the market value of each share decreasing in value, each stockholder
should end up with the same total market value as before the stock dividend. (If this reminds
you of a stock split, you are very perceptive. A stockholder of 100 shares would end up with
150 shares whether it was a 50% stock dividend or a 3-for-2 stock split. However, there will
be a difference in the accounting.)

Even though the total amount of stockholders' equity remains the same, a stock dividend
requires a journal entry to transfer an amount from the retained earnings section of the
balance sheet to the paid-in capital section of the balance sheet. The amount transferred
depends on whether the stock dividend is (1) a small stock dividend, or (2) a large stock
dividend.

1. Small stock dividend. A stock dividend is considered to be small if the new shares
being issued are less than 20-25% of the total number of shares outstanding prior to
the stock dividend.

On the declaration date of a small stock dividend, a journal entry is made to transfer
the market value of the shares being issued from retained earnings to the paid-in
capital section of stockholders' equity.

2. Large stock dividend. A stock dividend is considered to be large if the new shares
being issued are more than 20-25% of the total value of shares outstanding prior to
the stock dividend.

On the declaration date of a large stock dividend, a journal entry is made to transfer
the par value of the shares being issued from retained earnings to the paid-in capital
section of stockholders' equity.