 Hello, and welcome to the session in which we will discuss stock dividend. What are stock dividend? What's the big idea? Well, for one thing, we are dealing with dividends. What are dividend, dividend comes out of retained earnings. What is retained earnings? Well, the company generate revenues. That's what they do for a business. Then they incur expenses. Then what's left is net income, which is the same thing as their profit. Now, what's going to happen is they're going to park that profit in an account called initially retained earnings. And as the name of it, they are retaining, they are keeping. You are retaining something. And what's that something? It's your earning. It's your profit. And at some point, the company might decide to pay out this earnings in dividend to the shareholders. And this is what dividend is. Now, in this session, we're not talking about cash dividend. That was the prior session. We're going to talk about stock dividend. So rather than giving you cash, we're going to reward the shareholders, but we're going to preserve the cash. We're not going to give the cash out. Now, why not? Well, many reasons. One is we may need the cash for internal growth. So simply put, the company will need the cash to invest in R&D, to buy property, plant and equipment, to expand the company, or they may need the cash simply to operate the business. So that's why we don't pay out the cash. So what we're going to do is this, we're going to reduce retained earnings and we're going to increase common stock. So simply put, we are going to take the retained earnings out, but not in cash. We're going to replace it with, we're not going to give out the cash. We're going to take the retained earnings out and increase common stock. What is common stock? The stockholders ownership. So this is the plan. So notice in this process, we did not affect asset. We did not pay out cash. So there's no cash involved. There's no liabilities involved. Notice when we paid cash, if you remember, we declared the dividend first and became a liability here. There's no liability. We are under no obligation. We decided to take our retained earning and distributed in common stock. And there is no effect on total equity. Why not? Because retained earning went down through, then we issued new shares. Common stock went up. So the total effect on equity none. So notice there is no effect on assets, no effect on liabilities, no effect on equity. So then issue the new ownership and the proportion of the current ownership. So for example, if the company has in total 10,000 shares, and you own 1,000 of those shares, it means you own 10%. Now, if the company decided to issue 5,000 new shares, 5,000 new shares, you will be getting 10% of those. You will be getting 500 shares. So you will receive a proportion of your shares. So this is what it is. So company does not receive anything in return. So when they give you those 500 shares, because you own 10% of the company, because you own 10% of the company. Well, you're going to keep your current ownership, but you don't give them anything in return. Again, there's no change in total equity, but the structure of the equity changes. Why? Retained earning goes down. Common stock goes up. Don't worry, we're going to look at an example to see this. Also, we have to differentiate between two types of stock dividends. We have small stock dividend and a large stock dividend. So what's the difference between the two? Small stock dividend is when the company issue new stock that are less than 20 to 25% of the outstanding stocks. Let's assume the company will have 100,000 shares outstanding. If they issue new, they decided to issue new 18,000 shares and distributed, 18,000 is of 100,000 is 18%. That's considered small stock dividend. If the company decided to issue 35,000 shares, well, guess what? It's more than 20 to 25%. What would that make it? That would make it a large. Now, you might be asked, what happened if the issue 22%, don't worry. You don't have to worry about this on the CPA exam, nor in your accounting courses. So what's going to happen is this, if the issue is a new small, if the, if the new stock dividend is a small stock dividend. Now in the problem, here's the trick that you have to remember on the CPA exam and your exam, on your exam, the test, the whoever wrote the test, they don't tell you it's a small or a large. They will tell you the issue 18,000 shares. You have to understand 18,000 is 18% out of the, out of the outstanding shares, which is a small. If that's the case, we debit retained earnings. Remember, every time we declare dividend retained earnings, we have this retained earnings will go down. How much do we bring down retained earnings? We're going to take the 18,000 shares since it's a small times the market value of the stock. So we debit retained earnings for the fair value of the stock. And this should be given. Okay. Now, why do we debit the fair value of the stock? Because the assumption is we issued new, new shares, but the amount is small. It's not going to make any change to the stock price. Now, if we issue, if we considered, if we consider the new stock dividend as a large stock dividend, let's assume we're issuing 35,000 new shares, what's going to happen is we're going to debit retained earnings, 18,000, 35,000, and be careful. This is the difference. This is the main difference, 35,000 times the par value. Obviously we're going to work an example. I'm just showing you the rules. So the debit here, the debit retained earnings is the number of shares debit retained earnings for the par value of the stock. So the number of shares times the par value, small number of shares times the fair market value. Here we assume that why don't we use the market share? Because we assume the market share, it's going to be influenced because we're issuing a large number of shares. As a result, the price of the share usually will go down. Now, the best way to illustrate this concept is to take a look at an example. So I'm going to be looking at this company where they have common stock, $10 par value, 20,000 share issued, which give us 200,000 in common stock. The company has 50,000 of additional paid in capital and retained earnings of 450,000. So all in all, we have total equity of 700,000. And this is before we declare any stock dividend. Before we proceed, I would like to remind you whether you are an accounting student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your CPA review course. Most likely if you're studying for your exam, you have a CPA review course and that's great. You keep it. I'm a supplemental tool. I'm a useful addition to that CPA review course, nor I replace your accounting course. 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The best way to illustrate the concept is to actually work an example. Let's assume Adam Company has 10,000 shares of $1 par value common stock. The board of directors decided to issue 1,000 stock in dividends. So we have 1,000 out of 10,000. That's the first thing you want to take a look at is 10%. This is we are dealing with a small stock dividend. You have to know whether it's a small or large. If it's a small, we need the fair value. The fair value is giving will always be giving $6. Let's start the entry. We're going to debit retained earnings for the number of shares issued times the fair value, which is 1,000 new shares times $6. That's going to give us $6,000. We're going to credit common stock dividend, distributable, a new equity account, common stock. This is going to become common stock. How do we credit common stock? Well, we credit common stock, the number of shares times the par value, which is, I'm sorry, number of shares, which is a thousand new shares times the par value, a thousand. What's left is paid in capital, par value, common stock, 5,000. And this is the entry that we make on the declaration date. So let's see what's going to happen after the declaration date. After the declaration date, we're going to have a new account on the equity section called common stock dividend, distributable. And that's going to give us $1,000. It's going to be a new $1,000. Common stock was not affected yet. We did not issue the stock yet, and we have an additional $5,000 to additional paid in capital, $55,000, and retained earning went down six. So notice what happened. Retained earning goes down six. Common stock dividend, distributable became a thousand. And the remaining $5,000 went into paid in capital. So what happened to the overall equity? It's still the same, $700,000. So what's going to happen on the distribution date? On the distribution date, we are going to distribute the stock. Therefore, this common stock dividend, distributable, we're going to debit this account, therefore, it's going to be gone. We're going to get rid of this account. And we're going to credit regular common stock. Simply put, we're going to take the $200,000 will become $201,000. Basically the same thing. All what we did is we took $6,000 out of retained earnings. So we subtracted basically $6,000 out of retained earnings. We added $5,000 plus $1,000. And that's all what happened. So all in all, total equity is still the same. This is for a small stock dividend. Let's change the scenario and look at a large stock dividend. Already told you it's large, but usually on the exam, they don't tell you this. Adam company has $1,000, $1 par value common stock. The board of directors decided to issue 4,000, 4,000 new stock dividend. 4,000 divided by 10,000 is 40%. Now I'm dealing 40%. I'm dealing with a large stock dividend. So notice they gave you the fair value. I give you the fair value to confuse you. So you have to be careful. Don't say, well, I was giving the fair value. I was confused. Be careful. It's it's a large for a large stock dividend. We are going to debit retained earnings for the number of shares times the times the par value, $4,000. We credit common stock dividend to be distributed 4,000. Notice we don't have paid in capital. Why not? Because we're issuing the shares at par. So we don't have any additional par value. So this is on the declaration date and notice what happened. All what we did is we reduced retained earning by 4,000. It went to common stock dividend distributable for now. So retained earnings went down. Common stock dividend distributable went up. Equity is still the same on a distribution date. We're going to get rid of this number because we're going to issue the stock. We're going to get rid of it and add it to common stock. Now we have common stock, 204,000. Well, let's take a look at our equity again. All what we did is we took 4,000. This went down by 4,000. This went up by 4,000 because these two accounts cancel each other out. And this is a large stock dividend. What should you do now? Go to farhatlectures.com and work multiple choice questions and look at additional resources at the end of this recording. I'm going to remind you if you are an accounting student, invest in yourself, invest in your career, especially if you're a CPA candidate. Don't shortchange yourself. My subscription will give you additional information that's going to help you with your CPA review course, which will help you on your exam. Don't shortchange yourself. The CPA exam is worth it. Good luck. Study hard. And of course, stay safe.