The amounts within the accounts are merely shifted from the earned capital account (Retained Earnings) to the contributed capital accounts (Common Stock and Additional Paid-in Capital). Prior to the distribution, the company had 60,000 shares outstanding. The difference is the 3,000 additional shares of the stock dividend distribution.
On the other hand, stock dividends distribute additional shares of stock, and because stock is part of equity and not an asset, stock dividends do not become liabilities when declared. Cash or stock dividends distributed to shareholders are not recorded as an expense on a company’s income statement. Stock and cash dividends do not affect a company’s net income or profit. Instead, dividends impact the shareholders’ equity section of the balance sheet. Dividends, whether cash or stock, represent a reward to investors for their investment in the company. Cash dividends are corporate earnings that companies pass along to their shareholders.
Large stock dividend
While a company technically has no control over its common stock price, a stock’s market value is often affected by a stock split. When a split occurs, the market value per share is reduced to balance the increase in the number of outstanding shares. In a 2-for-1 split, for example, the value per share typically will be reduced by half. As such, although the number of outstanding shares and the price change, the total market value remains constant. The total value of the candy does not increase just because there are more pieces. Stock dividends are corporate earnings that are distributed to stockholders.
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What is a stock dividend?
Both types of stock dividends impact the accounts in stockholders’ equity. A stock split causes no change in any of the accounts within stockholders’ equity. The impact on the financial stock dividends are recorded at market value, while stock dividends are recorded at par value statement usually does not drive the decision to choose between one of the stock dividend types or a stock split. Instead, the decision is typically based on its effect on the market.
The existence of a cumulative preferred stock dividend in arrears is information that must be disclosed in financial statements. Only dividends that have been formally declared by the board of directors are recorded as liabilities. If cumulative, a note to the financial statements should explain Wington’s obligation for any preferred stock dividends in arrears. Note that dividends are distributed or paid only to shares of stock that are outstanding.
