Stock dividend accounting

Stock Dividend Overview

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

A business typically issues a stock dividend when it does not have sufficient cash to pay out a normal dividend, and so resorts to a "paper" distribution of additional shares to investors. A stock dividend is never treated as a liability of the issuer, since the issuance does not reduce assets. Consequently, this type of dividend cannot realistically be considered a distribution of assets to shareholders.

When there is a stock dividend, the related accounting is to 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.

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