Journal Entry Sequences for Stock Dividends Format, Example

When a company issues additional stock shares for any reason, the result is stock dilution. More shares in circulation means a reduction in the earnings per share (EPS) of the existing shares, and in the ownership percentage held by each current shareholder. On the other hand, if the company issues stock dividends more than 20% to 25% of its total common stocks, the par value is used to assign the value to the dividend. At the time dividends are declared, the board establishes a date of record and a date of payment. The date of record establishes who is entitled to receive a dividend; stockholders who own stock on the date of record are entitled to receive a dividend even if they sell it prior to the date of payment.

A stock dividend may be paid out when a company wants to reward its investors but either doesn’t have the spare cash or prefers to save it for other uses. The stock dividend has the advantage of rewarding shareholders without reducing the company’s cash balance. Dividends are typically paid in cash, but they can also be distributed in the form of additional shares of stock or other investments. To illustrate, assume that Duratech Corporation’s balance sheet at the end of its second year of operations shows the following in the stockholders’ equity section prior to the declaration of a large stock dividend. The date of record determines which shareholders will receive the dividends.

A stock dividend is a reward for shareholders made in additional shares instead of cash. The stock dividend rewards shareholders without reducing the company’s cash balance. It has the adverse effect of diluting earnings per share, at least temporarily. A stock long term notes payable dividend is a payment to shareholders that consists of additional shares of a company’s stock rather than cash.

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. Depending on your individual circumstances, dividends received may be subject to taxation.

Accounting for Stock Dividends

In such cases, it is not appropriate to account for the stock dividends as such. It also helps keep a company’s perception in the market and helps avoid bad publicity. Stock dividends may signal financial instability or at least limited cash reserves. For the investor, stock dividends offer no immediate payoff but may increase in value over time. Of course, the investor can simply sell the extra shares and collect the cash.

Briefly indicate the accounting entries necessary to recognize the split in the company’s accounting records and the effect the split will have on the company’s balance sheet. Stock dividends (also called bonus shares) refer to issuance of shares of common stock by a company to its existing shareholders in the proportion of their shareholding without any receipt of cash. The company makes journal entry on this date to eliminate the dividend payable and reduce the cash in the how to calculate contribution per unit amount of dividends declared.

1. The split causes the number of shares outstanding to increase by four times to 240,000 shares (4 × 60,000), and the par value to decline to one-fourth of its original value, to $0.125 per share ($0.50 ÷ 4).
2. A stock dividend distributes shares so that after the distribution, all stockholders have the exact same percentage of ownership that they held prior to the dividend.
3. Briefly indicate the accounting entries necessary to recognize the split in the company’s accounting records and the effect the split will have on the company’s balance sheet.
4. A dividend-paying stock generally pays 2% to 5% annually, whether in cash or shares.
5. Stock dividends are dividends issued in the form of new shares rather than cash by a company.

Capitalization of Shareholder Loans to Equity

Declaration date is the date that the board of directors declares the dividend to be paid to shareholders. It is the date that the company commits to the legal obligation of paying dividend. Hence, the company needs to make a proper journal entry for the declared dividend on this date. 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. Large stock dividends are when a company issue more than 25% of new shares in proportion to the total value of existing shares.

Large stock dividend journal entry

In this case, the journal entry transfers the par value of the issued shares from retained earnings to paid-in capital. A reverse stock split occurs when a company attempts to increase the market price per share by reducing the number of shares of stock. For example, a 1-for-3 stock split is called a reverse split since it reduces the number of shares of stock outstanding by two-thirds and triples the par or stated value per share. A primary motivator of companies invoking reverse splits is to avoid being delisted and taken off a stock exchange for failure to maintain the exchange’s minimum share price.

Investors who purchase shares after the date of record but before the payment date are not entitled to receive dividends since they did not own the stock on the date of record. The date of payment is the date that payment is issued to the investor for the amount of the dividend declared. On the payment date of dividends, the company needs to make the journal entry by debiting dividends payable account and crediting cash account. Dividend is usually declared by the board of directors before it is paid out. Hence, the company needs to account for dividends by making journal entries properly, especially when the declaration date and the payment date are in the different accounting periods. 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.

There is no journal entry recorded; the company creates a list of the stockholders that will receive dividends. As a stock dividend represents an increase in common stock without any receipt of cash, it is recognized by debiting retained earnings and crediting common stock. The amount at which retained earnings is debited depends on the level of stock dividend, i.e. whether is a small stock dividend or a large stock dividend. However, sometimes the company does not have a dividend account such as dividends declared account. This is usually the case in which the company doesn’t want to bother keeping the general ledger of the current year dividends. The total equity of the shareholders remains the same after a large stock dividend.