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AccountingforDividends
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AccountingforDividends
Note that the size of the dividend declared is important. If the company declares a
25% or less stock dividend (as a percentage of the company's previous total outstanding shares) then the value of the stock
dividend declared is equal to the market value of the shares issued. (Common shares are increased to reflect value of dividend.)
If the stock dividend is larger than 25%, the company will transfer 100% of the par or stated value of the common shares to the
common-stock account.
Examples:
Stock dividends are best learned by considering an example of a situation where the stock dividend is 25% or less of previously
outstanding shares, and where the stock dividend is 25% or more of the previously outstanding shares.
Look Out!
The most common mistake students make in this section is that they forget to calculate if the stock dividend is less than or
higher than 25% of the shares outstanding and the reporting effect it will have.
Stock Split
Stock splits are events that increase the number of shares outstanding and reduce the par or stated value per share of the
company's stock. For example, a two-for-one stock split means that the company stockholders will receive two shares for every
share they currently own. This will double the number of shares outstanding and reduce by half the par value per share. Existing
shareholders will see their shareholdings double in quantity, but there will be no change in the proportional ownership
represented by the shares (i.e. a shareholder owning 2,000 shares out of 100,000 would then own 4,000 shares out of 200,000).
Most importantly, the total par value of shares outstanding is not affected by a stock split (i.e. the number of shares times par
value per share does not change). Therefore, no journal entry is needed to account for a stock split. A memorandum notation in
the accounting records indicates the decreased par value and increased number of shares.
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AccountingforDividends
Stocks that are trading on the exchange will normally be re-priced in accordance to the stock split. For example, if XYZ stock was
trading at $90 and the company did a 3-for-1 stock split, the stock would open at $30 a share.
Stock splits are usually done to increase the liquidity of the stock (more shares outstanding) and to make it more affordable for
investors to buy regular lots (regular lot = 100 shares).
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