Stock Dividends and Splits

Question 1

What is a stock dividend?

Answer 1

A distribution by a firm of its stock it its shareholders in proportion to their existing holdings.

Question 2

Is a liability recorded in relation to a stock dividend?

Answer 2

No. Stock dividends do not involve a future transfer of assets or a future provision of services, each investor simply holds more shares.

Question 3

What are the effects of a stock dividend?

Answer 3

• Increases the number of shares issued and outstanding.
• Earnings per share decreased
• Stock dividend is a permanent capitalization of RE into contributed capital

Question 4

In a stock dividend, if the % of dividend is less than 25% how is it accounted for?

Answer 4

By capitalizing at market price, i.e., Debit RE for FMV of stock. Use the market price of the stock at DECLARATION date

Question 5

In a stock dividend, if the % of dividend is greater than 25% how is it accounted for?

Answer 5

Capitalize at Par Value. i.e., debit RE for Par Value

Question 6

What is a stock split?

Answer 6

Not a dividend, rather an adjustment to par value and number of issued shared. 2-for-1 split halves the par value and doubles the number of shares

Question 7

What is the purpose of a stock split?

Answer 7

To reduce the market price and make the shares available to a larger number of shareholders.

Question 8

Is there a change in OE when a stock split occurs?

Answer 8

No and no accounting entry is needed, although firms usually make a memo entry.