Question

What is a stock dividend? Describe and discuss reasons why a company would choose to give dividends in the form of stock rather than cash. In your response explain how issuance of a stock dividend affects the accounting records.

Answer 1

Stock Dividends: The dividend paid in form of allotment of additional shares to existing shareholders instead of paying cash dividends are called stock dividends. The stock dividends are paid by the company due to any of the following reasons.

1. The company do not have sufficient reserves to pay dividend
2. The company wants to retain the liquidity by retaining cash.

Affect of issuance of stock dividend on the accounting records:

The issue of stock dividend requires the following journal entry

Dr >> Retained Earnings (no. of share issued * market price of the share) XXXX
Cr >> Common Stock A/c (to the extent of par value) XXXX
Cr >> Paid-in Capital in excess of par value (over and above par value) XXXX

Therefore the issuance of stock dividend will convert the free reserves into capital and capital reserve.