CHAPTER FIVE-CORPORATION

• STOCK DIVIDENDS
 Instead of distributing cash as dividends to its stockholders, the corporation can distribute additional
shares of stock to stockholders.
 A stock dividend is a distribution to stockholders of the corporation’s own stock according to their
ownership percentages.
 A company issues additional shares of stock in a stock dividend which results in a decrease in
Retained Earnings and an increase in Paid-in Capital. However, total stockholders’ equity remains
unchanged since the decrease in retained earnings and the increase in Paid-in Capital are in the same
amounts.
 A stockholder will own more shares of stock, but his ownership percentage does not change as its
percentage of total outstanding shares will be the same.
STOCK DIVIDEND SIZE (PAGE 227)

 A stock dividend might be a:

 Small stock dividend: a stock dividend that is less than 20–25% of the corporation’s outstanding
shares.
 Large stock dividend: a stock dividend that is greater than 20–25% of outstanding shares.
 SMALL STOCK DIVIDEND PAGE 228

Example:

Assume that on October 1, 2017, Melody Inc. has a balance of $500,000 in retained earnings. It declares a 15% stock dividend on its

100,000 shares of $10 par value common stock outstanding. At that date, the fair market value of Melody’s stock is $14 per share. On

November 1, 2017, Melody Inc. issues the shares for the stock dividend declared on October 1.

Number of Shares Issued for Number of Percentage of Stock

 The first step is to determine the number =
of shares that the Outstanding
corporation issue ×
for the stock dividend.
Stock Dividend Shares Dividend
PAGE 228

 Once the stock dividend is distributed, the total number of Melody Inc.'s outstanding shares change to
115,000 shares

Total New Number of Old Number of Number of Shares Issued for

=  
Outstanding Shares Outstanding Shares the Stock Dividend
PAGE 228

 On Declaration date: Small stock divided new issued shares are

recorded at MARKET VALUE

Date Account Title and Explanation Ref Debit Credit

2017 Stock Dividends 210,000  
Oct 1 Common Stock Dividends Distributable   150,000
Paid-in Capital in Excess of Par – Common Stock 60,000

 Stock Dividends Amount =Number of issued shares ×Market value=15,000×$14=$210,000

 Common Stock Dividends Distributable Amount =Number of issued shares ×Par value=15,000×$10=$150,000
 Paid-In Capital in Excess of Par=Number of issued shares ×(Market value- Par value)=15,000×($14-
$10)=$60,000
PAGE 229

When the corporation issues the stock dividend, it debits Common Stock Dividends Distributable account
and credits Common Stock. On November 1, 2017, Melody Inc. records the issuance of the stock split as
follows:

Date Account Title and Explanation Ref Debit Credit

2017 Common Stock Dividends Distributable 150,000  
Nov 1 Common Stock   150,000
LARGE STOCK DIVIDEND (PAGE 229)
 Example:

Assume that on October 1, 2017, Melody Inc. declares a 30% stock dividend on its 100,000 shares of $10 par value common stock. The fair
market value of Melody’s stock is $14 per share. On November 1, 2017, Melody issues the shares for the stock dividend declared on
October 1.
 The company issues 30,000 (100,000×30%) shares as stock dividend, each valued at the par which is $10.

 Number of Shares Issued for Stock Dividend =Number of outstanding shares×Percentage of stock dividend=100,000×30%=30,000 share

 The total new number of Melody's outstanding shares after the issuance of the shares for a 30% stock dividend is 130,000 shares
(100,000+30,000). The stock dividend amount and the common stock dividends distributable amount are:

 Stock Dividends Amount =Number of issued shares ×Par value=30,000×$10=$300,000

 Common Stock Dividends Distributable Amount =Number of issued shares ×Par value=30,000×$10=$300,000
PAGE 229-230

Large stock divided new issued shares are

recorded at PAR VALUE

Date Account Title and Explanation Ref Debit Credit

2017 Stock Dividends 30,000*10 300,000  
Oct 1 Common Stock Dividends Distributable   300,000
 

Date Account Title and Explanation Ref Debit Credit

2017 Common Stock Dividends Distributable 300,000  
Nov 1 Common Stock   300,000
EXERCISE ON PAGE 230
On January 1, 2017, Moon Inc. has 500,000 shares of $5 par value common stock outstanding. On that day, the

corporation’s board of directors declares a 10% stock dividend to be issued on February 15, 2017. The fair market value of

Moon Inc.’s common stock is $8 on January 1, 2017.

Instructions: Prepare the journal entries to record Moon Inc.’s declaration of the stock dividends and the issuance of the

stock dividends.
Date Account Title and Explanation Ref Debit Credit
  Stock Dividend (0.1 x 500,000) x 8 400,000  
Jan 1 2017 CS Dividend Distributable (0.1x 500,000) x 5   250,000
Paid in Capital in Excess of par- CS 150,000

 Feb 15 CS Dividend Distributable 250,000  

2017 Common Stock   250,000
EXERCISE ON PAGE 230

Moral Corporation has 1,000,000 shares of $1 par value common stock outstanding. The corporation
declares a 35% stock dividend on January 1, 2017 to be issued on February 1, 2017. On the declaration
date, the fair market value of the corporation’s common stock is $5.
Instructions: Prepare the journal entries to record Moon Inc.’s declaration of the stock dividends and the
issuance of the stock dividends.

Date Account Title and Explanation Ref Debit Credit

  Stock Dividend (0.35 x 1,000,000) x 1 350,000  
Jan 1 2017 CS Dividend Distributable 350,000
 
(0.35 x 1,000,000) x 1  
 
  CS Dividend Distributable 350,000  
Feb 1 2017 Common Stock   350,000
 STOCK SPLIT (PAGE 231)

 A stock split involves the splitting of shares according to a specific rate. A stock split decreases par value per share by

dividing it by the rate. The stock split also increases the number of outstanding shares of stock by the same rate. A stock
split has no effect on total paid-in capital, retained earnings, or total stockholders’ equity. However, it changes the total
number of outstanding shares and their par value. No entry is to be recorded for a stock split, but a memo must be
written to document the stock split.

 To illustrate, assume that on October 1, 2017, Bat Inc. announces a 2:1 stock split on its 70,000 shares of $10 par value

common stock outstanding. Under this split (2-for-1 split), one share of $10 par value stock is exchanged for two shares of
$5 par value common stock. TheAccount
Date memo announcing the stock split is:
Title and Explanation Ref Debit Credit
2017 Memo: 2-for-1 stock split increases the number of outstanding shares    
Oct 1 to 140,000 shares and decreases the par value to $5 per share .