Tuesday, May 24, 2022

Stock Dividend vs Stock Split Accounting

Let's discuss how the accounting differs for a stock dividend versus a stock split so in each case the number of shares outstanding is going to go up for example if you had a two for one stock split or if you had a 100 stock dividend in each case it's going to double the number of shares so stock split stock dividend they're both going to increase .

The number of shares outstanding but beyond that there's a lot of differences for example with a stock split you don't have any journal entries so there's nothing to record into the financial records however you need to know that it's going to decrease the par value per share so here's an example so let's say we had a two for one split again two for .

One split means if the typical shareholder let's say they have 100 shares after the split they have 200 shares okay so let's say that before the split the common stock account so this is the equity section of the balance sheet common stock was two hundred thousand dollars we had a hundred thousand shares at two dollar par value .

Per share so a hundred thousand times two dollars uh we had two hundred thousand okay so that's our common stock and then we have retained earnings to seventy five thousand dollars now after the two for one split common stock is still two hundred thousand okay that has not changed and retained earnings is still seventy five 000. that has not .

Changed so total equity is unaffected there's no journal entry required however however okay we doubled the number of shares so now we have 200 000 shares instead of 100 000 shares and so we are going to we have cut the par value in half instead of it being two dollar par value uh per share now it's a dollar par value but the financial .

Statements are unaffected by this because you have whereas before you had a hundred thousand shares times two dollars par is two hundred thousand now you have double the amount of shares times half the par value equaling two hundred thousand okay so that's why you don't need a journal entry you just need to adjust uh make a note that the par .

Value is is has come down now with a stock dividend the par value per share is not going to change so we're not going to have this two dollars to one dollar that's not going to change the par value per per share is going to remain constant and we are going to have a journal entry now the nature of that journal entry is going to depend on .

Whether it's considered to be a large stock dividend or a small stock dividend basically if we do a large stock dividend we're going to use the par value per share to do our calculations for the journal entry if it's a small stock dividend we're going to use the fair value uh the the the company's stock price i'll show you that in a .

Second but in each case the common stock account is going to increase okay common stock is going to go up again with this stock split common stock did not change okay the part value per share went down but common stock remained constant there was we didn't even did a journal entry so let's say we've got a small stock dividend and by small i mean less than .

20 to 25 of the shares outstanding is the amount of the stock dividend okay so in this case so here's an example let's say metaverse plumbing they have a hundred thousand shares outstanding before the stock dividend okay and they were two dollar par value per share the fair value of this uh shares of 30 per share .

Before the stock dividend the company issues a five percent stock dividend now this is going to count as a small stock dividend okay five five percent stock dividend we had a hundred thousand shares outstanding so that basically means the people who are out there right now they own shares they're going to get 5 000 shares okay that'll be spread .

Among the existing shareholders okay pro on a pro rata basis so basically we're going from 100 000 shares outstanding so there's going to be 105 000 shares out there floating around okay so that's what we mean when they say it's a 5 stock dividend that's less than 20 to 25 of the shares outstanding so it's a small stock dividend that means this .

Fair value here of the stock before the dividend so that's that's going to be relevant we're going to use that 30 now here's what we're going to do in terms of the journal entries at the date of declaration so this is when the company declares the dividend okay so when they declare we're going to debit the retained earnings account okay .

And then we're going to credit this common stock dividend evident distributable okay this is a temporary account we're going to end up zeroing it out and when we distribute the dividend we're going to credit common stock so ultimately what is ultimately happening is we're going to reduce retained earnings and .

Then we're going to increase common stock but we're also going to increase additional paid in capital so let me just get to the calculation i'm getting a little ahead of myself here so we've got dollars a share is the fair uh fair market value of this stock that's the share price prior to the stock dividend .

Okay and then the the number of new shares is five thousand so five thousand new shares at thirty dollars uh market value per share it's a hundred and fifty thousand that's the amount by which we're going to reduce the company's retained earnings so this is five thousand shares times thirty dollars market value the fair value per share .

Okay now when it comes to crediting the amount that ultimately we're going to increase common stock okay and we've got this temporary account here we are going to do that that's going to be 5 000 shares but times that two dollar par value okay so common stock is ultimately going to go up by the par .

Value times the number of new shares so that's 10 000. remember i said the par value per share does not change with a stock dividend it does with a stock split so we've got two dollars per share 5 000 new shares to 10 000 so common stock dividend distributable it's going to be credited for 10 000 and then later when we actually make the company makes .

The distribution it's gonna zero out that dividend distributable account and it's going to credit common stock okay so common stocks ultimately going to go up uh by the par value per share by the number of new shares multiply those two okay now the remaining amount so you got 150 of debits and 10 000 credits so you obviously need 140 000 our credit here .

That's gonna be credited to additional paid-in capital okay so this is this is the set of journal entries for so we've got the date of when the dividend is uh the stock dividend has been declared and then here is the data distribution so ultimate effect retained earnings goes down additional paid in capital goes up common stock goes up .

Okay so again common stock is changing whereas the total amount of common stock we didn't make it journal entry with a stock split but here we have a journal entry common stock is actually going up basically if you think of the effect of this we have like shifted uh amounts from retained earnings to common stock and additional paid in capital .

Okay so that that's what happened here now let's say that we have a large stock dividend okay we have a large stock dividend so more than 20 to 25 of the shares outstanding let's say it's a 100 stock dividend okay it's 100 so there's a hundred thousand shares outstanding before the stock dividend .

Two dollar par value per share and shareholders are gonna receive a hundred thousand shares so basically there's a hundred thousand shares i'm saying now there's gonna be additional hundred thousand shares for two hundred thousand total okay now when it's a large stock dividend we don't need to worry about the the market value of this of the .

Share price okay so we don't have to worry about the fair value of the company's stock we're not going to deal with that we're just going to worry about this par value okay so the number of new shares which a hundred thousand in this case times the par value is 200 000 okay so we are going to debit retained earnings although some .

Companies do not debit retained earnings so it should have you know some companies would debit additional paid in capital so just let you know there's a little bit of diversity in practice here you either debit retained earnings or additional paid in capital okay for two hundred thousand dollars and then again we're going to credit .

This common stock dividend distributable uh for 200 000 that's just a temporary account because we've declared the dividends but we have not paid them yet okay now on the data distribution when we actually the company actually gives out that stock then they're going to debit and zero out that common stock dividend distributable okay debit that .

That zero is out and then they're going to credit the coleman stock account uh for 200 000 and again that's just the par value times the number of new shares now again notice the common stock account is going up in that account common stock the total amount of common stock was unaffected under a stock split but it goes up under a stock dividend .

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