Stock dividends are dividends issued in the form of new shares rather than cash by a company. It dilutes the share price of the company but the market capitalization remains the same.
Large stock dividends are when a company issue more than 25% of new shares in proportion to the total value of existing shares.
The ASC 505 Equity and ASC 505-20 issue of dividends provide guidance on the accounting treatment of the stock dividends.
What is a Stock Dividend?
A stock dividend is one form of “dividend in kind”. A company issues dividends in the form of stock instead of cash.
Stock dividends do not affect the shareholders’ ownership rights in the company. These shares are issued in proportion to the existing shares held by the shareholders.
A company resorts to stock dividends when it faces cash issues. Stock dividends help keep the shareholders satisfied. It also helps keep a company’s perception in the market and helps avoid bad publicity.
Large Stock Dividend – Definition
When a company issues new shares in proportion of more than 25% to the previously held shares, it is determined as a large stock dividend.
The total equity of the shareholders remains the same after a large stock dividend. The share price of the company must reflect the change though.
Shareholders do not receive any additional cash if there is a large stock dividend. However, shareholders have the option of converting shares into cash with an immediate sale.
The company transfers the balance from retained earnings to the additional paid-in capital account. There is no effect on the cash account.
Accounting for Dividends in Kind
A dividend should be recorded when a company declares it. The record books should reflect the dividends announced irrespective of the payment date that is set for a later date usually.
Stock dividends can be broadly termed under the dividend in kind segment. The ASC 845 non-monetary transactions provide guidance on the issuance of dividends in kind.
The ASC 845-10-30 states that the entity must record the dividend in kind at its fair value on the date it is declared. The first recording entry would be to record the dividend payable at the fair value. On the payment date, the entity would recognize any gains or losses compared to the market value on that date.
In some cases, the shares issued as dividends in kind can be sold partly or in full by the shareholder on the same day of payment. In such cases, it is not appropriate to account for the stock dividends as such.
Accounting for Stock Dividends
ASC 505-20-25 and ASC 505-20-30 provide guidance on the recording treatment of stock dividends.
The first step in accounting for stock dividends is to categorize the stock dividends into small stock or large stock dividends.
If the stock dividends announced by the entity are less than 25% (sometimes the threshold is set at 20%) of the previously existing shares, the issue will be considered a small stock dividend.
Stock dividends issued above 25% of the previously existing shares as dividends would be recognized as a large stock dividend. In accounting terms, many companies recognize a large stock dividend as a stock split as well.
Accounting Treatment of Small Stock Dividends
In practice, the small stock dividend is accounted for like a cash dividend. The company debits the retained earnings account for the stock dividends at the fair market value of the shares. Subsequently, the capital stock and the additional paid-in capital accounts are credited at par or stated value of the shares accordingly.
Accounting Treatment of Large Stock Dividends
When the company issues stock dividends in excess of 25% of the total value of the existing shares, it is treated as a stock split. There are two main points for dealing with large stock dividends as stock splits.
First, a large number of new shares is issued that dilutes the number of outstanding shares. The second, a large share issue results in market share price reduction after the stock dividend. Thus, it would be fair not to account for the large stock dividend as an earnings distribution event.
For a large stock dividend, the entity would record the transaction with a debit to the retained earnings (or any other major account used for distribution of shares) and a credit to the common stock account at par or stated value.
Note: The estimation of less than 25% of new shares is based on the evaluation that the stock dividend must not result in a reduced market share price.
Working Examples
Let us consider the accounting treatment for small and large stock dividends with the help of two simple working examples.
Small Stock Dividend
Suppose ABC company has the following data available regarding its existing shares and a stock dividend announcement.
On September 1,
Common share at $ 1 par outstanding = 1,000,000.
Market value of stocks = $ 35
Additional Paid-in Capital = $ 30,000,000
Retained Earnings = $ 8,000,000
The ABC company announced a 15% stock dividend. (Each share becomes 1.15 times after the stock dividend).
New shares for stock dividends = 150,000
Market Share price after stock dividend = $ 35/1.15 = $30.43
Stock dividend amount at new share price = 150,000 × 30.43 = $ 4,564,500
The accounting entries on September 1 will be:
| Account | Debit | Credit |
| Retained Earnings | $ 4,564,500 | |
| Stocks Dividend Distributable | $ 150,000 | |
| Additional Paid-in Capital | $ 4,414,500 |
The accounting entry at the Stock Dividend payment date September 10:
| Account | Debit | Credit |
| Stocks Dividend Distributable | $ 150,000 | |
| Common Stock at par $1 | $ 150,000 |
Large Stock Dividend
Suppose ABC company announced a 30% stock dividend with the same data as discussed in the above example.
New shares for stock dividends = 300,000
Since it is a large stock dividend, the US GAAP rules under ASC 505-20 require the journal entry should be recorded with new common stock at par value.
The accounting entries on September 1 will be:
| Account | Debit | Credit |
| Retained Earnings | $ 300,000 | |
| Stocks Dividend Distributable | $ 300,000 |
The accounting entry at the stock dividend payment date September 10:
| Account | Debit | Credit |
| Stocks Dividend Distributable | $ 300,000 | |
| Common Stock at par $1 | $ 300,000 |
