Accounting for Small Stock Dividend

Dividends refer to payments that are made by a company to its shareholders from its accumulated distributable earnings. The dividends will either be in cash or in some kind of consideration (i-e; stocks, shares of a listed company, etc). When a corporation issues a dividend of its common stock to its common shareholders without any consideration, such issuance of dividends is a stock dividend.

What is a Small Stock Dividend?

A small stock dividend is usually common in corporate structures and is defined under the US GAAP (Generally Accepted Accounting Principles) in ASC 505-20 as follows:

“A dividend distribution of 25 percent or less outstanding company shares to existing stockholders, is called small stock dividend.”

In other words, a small stock dividend is one that increases outstanding shares by less than 26 percent, through issuing new shares to the existing shareholders based on their percentage of right in the business or corporation. If the issuance is for a greater proportion of the previously outstanding shares, then it will be considered as a stock split.

Why does a Company Issue a Small Stock Dividend?

A stock dividend is issued by the business when they do not have sufficient cash to give a normal dividend (i-e; cash dividend), but they still want to give the appearance of issuing a dividend payment to its shareholders in their financial statements. This situation might arise when there is pressure from stakeholders (i-e; shareholders) to issue a dividend or sometimes when the company does not have enough cash or cash flows to pay investors, the board of directors of the company declares a stock dividend to keep investors happy.

READ:  Implementation Challenges of Activity-Based Costing – What are the Pros and Cons of the ABC Method?

How to Account for Small Stock Dividend?

The small stock dividends are accounted for under the US GAAP as follows;

When a corporation issues a stock dividend, a distribution of stock transfers part of retained earnings to the contributed capital accounts on the annual balance sheet of the corporation.

In other words, when there is an issuance of a small stock dividend, it should be transferred from retained earnings to the capital stock and additionally, paid-in capital accounts an amount equal to the fair value of additional shares or rights issued. The fair value of additional shares issued is based on the fair market value of those shares after the dividend has been declared.

After this transaction, the number of shares and amount of legal capital will be increased by the par value of the additional shares issued but it should be noted that this increased amount can no longer be issued to the shareholders as dividends.

The following journal entries will be passed when a small stock dividend is declared to be issued;

On the date of declaration of small stock dividend, the following journal entry will be recorded;

Account NameDebitCredit
Retained EarningsXXX 
Common Stock Dividend Distributable XXX
Additional paid-in capital XXX

After the declaration of small stock dividend, the following entry is made when shares are distributed to the shareholders;

Account NameDebitCredit
Common Stock Dividend DistributableXxx 
Common Stock Xxx

Examples of Small Stock Dividend Accounting

Some examples on how to account for small stock dividends under the US GAAP are given as follows for better understanding;

READ:  What is Job Order Costing?

Example #1

ABC Corporation is a small corporation and for the year ended 2021, the board of directors in their board meeting decided that they will issue small stock dividends to their existing shareholders instead of cash dividends, as they do not have enough cash to pay the dividends but the shareholders were pressurizing them for the payment of dividends. A stock dividend of 12,000 shares was declared on 31 December 2021, the fair market value of the stock was $10 per share and the par value was $1 per share. Shares were distributed to the stockholders on 1st January 2022.

How ABC corporations should record this issue of stock dividend? Pass the journal entry of the respective transaction.

From the example above, ABC corporations should transfer the declared stock dividend of $120,000 (i-e; 12000 x $10) from retained earnings to the capital stock and additional paid-in capital account at the fair market value of the additional shares issued. If the declared date and issuance date are different, at the date of declaration, ABC can use stock dividend distributable as a temporary account instead of a common stock account and this will be transferred to a common stock account when the stocks are issued.

The journal entry for the declaration of small stock dividend will be as follows;

Account NameDebitCredit
Retained Earnings$120,000 
Common Stock Dividend Distributable $12,000
Additional paid-in capital $108,000

After the declaration, following journal entry will be made to record the share distribution to its stockholders;

Account NameDebitCredit
Common Stock Dividend Distributable$12,000 
Common Stock $12,000

Example #2

XYZ is a small company and currently, they have 10,000 outstanding $10 per share of stock and they are authorized to issue another 5000. The company’s retained earnings account has a $20,000 balance and the fair market value of each share is $18 per share. The board of directors of XYZ declared a 10 percent stock dividend to all the existing shareholders on 31st June 2021, as they were facing a cash shortage but still wanted to keep shareholders happy. The declared shares were distributed on 1st July 2021 to its shareholders.

READ:  Rolling Budget: A Robust Approach to Budgeting

Record the issuance of stock dividend by XYZ Company and pass journal entry.

From the example above, on the date of issuance of stock dividend, 10 percent more shares will be issued to each shareholder based on their percentage of rights or investment in the XYZ Company, this will increase the total number of shares by 10 percent after the stock dividend is issued.

This transaction will be recorded by XYZ Company as follows:

The newly issued and distributed shares will be capitalized at the fair market value and will be transferred from retained earnings to the capital stock and additional paid-in capital.

The journal entry to record the declaration of small stock dividend by XYZ Company will be passed as follows:

Account NameDebitCredit
Retained Earnings$18,000 
Common Stock Dividend Distributable $10,000
Additional paid-in capital $8,000

To record the share distribution by XYZ Company, following journal entry will be made;

Account NameDebitCredit
Common Stock Dividend Distributable$10,000 
Common Stock $10,000

Conclusion

When a business does not have enough cash to pay dividends and they issue a small stock dividend, the investors get a return on their investment and the business or corporation does not have to deplete its cash position. Such dividends are also common in mergers and corporate restructuring deals.

Scroll to Top