Question

A small stock dividend:

a) Results in a transfer of retained earnings to common stock and additional paid-in capital.

b) Increases the number of shares outstanding and involves a pro rata reduction in the par value per share.

c) Is accounted for in exactly the same manner as a stock split.

d) Results in a transfer of retained earnings to additional paid-in capital and also increases the number of shares outstanding and involves a pro rata reduction in the par value per share.

Answer 1

Answer = A

Small Stock dividend means the company is declaring dividend in the form of Shares i.e. it doesn’t involve Cash. It means company is giving some shares to the Shareholders. It will increase the number of outstanding shares for the company.

Example

If a company declares 5% Stock dividend that means if a person holds 100 shares then he will get 5 Shares as Stock dividend.

Journal

	Dr. $	Cr. $
Retained Earnings	xxx
Common Stock		xxx
Additional Paid in capital		xxx

So Stock Dividend results in transfer of retained earnings to common stock and additional paid in capital.

Option B and D are not correct as Stock dividend does not reduce the par value of shares and Option C is not correct as Stock split means the company is dividing 1 Share but Stock dividend doesn’t mean this.