Stock Dividend Accounting

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Stock Dividend Overview

A stock dividend is the issuance by a corporation of its common stock to its common shareholders without any consideration. If a corporation issues less than 25 percent of the total amount of the number of previously outstanding shares, you should treat the transaction as a stock dividend. If the issuance is for a greater proportion of the previously outstanding shares, then treat the transaction as a stock split.

When there is a stock dividend, you should transfer from retained earnings to the capital stock and additional paid-in capital accounts an amount equal to the fair value of the additional shares issued. The fair value of the additional shares issued is based on their market value after the dividend is declared.

A stock dividend is never treated as a liability, since it does not reduce assets.

Stock Dividend Example

Davidson Motors declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1.00. Davidson records the following entry:

	Debit	Credit
Retained earnings	50,000
Common stock, $1 par value		10,000
Additional paid-in capital		40,000