 and welcome to the session. This is Professor Farhad and this session we're going to be looking at stock dividend, whether it's small or large, as well as stock split. This topic is covered in a financial accounting course and it's also covered on the CPA FAR exam section. As always, I would like to remind you, my viewers, to connect with me on a professional as well as a personal level. Please, if you have a LinkedIn account, connect with me on LinkedIn. If you don't have a LinkedIn account, I strongly suggest you do start a LinkedIn account. Facebook, if you are a Facebook user, please like my Facebook page and you want to make sure you subscribe to my YouTube. This is where I house all my lectures. Please like them, share them, put them in playlists, let the world know about them. If they're beneficial to you, they might be beneficial for others. I also have a Instagram account and a website. So what is the reason for stock dividend? Well, company generally satisfy shareholders by giving them cash. So that's because cash shareholders can do anything with cash. So they like this. Sometimes the company needs to preserve the cash. But nevertheless, they want to reward the shareholders. So what they do, they will give them additional stocks. Rather than giving them cash, they will give them additional stocks of the company. And that stock is distributed on a pro-rata basis. What does it mean? It means if you own 5% of the company and the company is issuing 100,000 new shares, you will get 5,000 shares because you own 5%. Reasons why the company issue stock dividend. The first reason is what some of the reasons is to satisfy stockholders dividend expectation. The stockholders wants to receive dividend. That's why you invest in the company. At the same time, the company wants to preserve their cash. They don't want to spend the cash. Therefore, they'll give you dividend and stock dividend instead. Another reason it increased the marketability of the corporation stocks. What happened when you distribute new shares, the price of the stock goes down. And you will see how and why because you have new shares, new shares supposed to drive the stock price down because it's supplying in demand. Therefore, it makes the stock more marketable. Emphasize a portion of stockholders equity has been permanently reinvested in the business. So basically what's going to happen when you do a stock dividend, basically you're going to take the dividend out of retained earning and put it into common stock. What does that mean? It's going to show that the company is reinvesting in its owner in itself. So we have two types of stock dividend that you need to be aware of. We have small stock dividend, which is less than 20 to 25 percent of the corporation issued stock recorded at fair value. And we have large stock dividend, which is greater than 20 to 25 percent. What does that mean? Let's assume the company currently have one million shares outstanding. If the company issue 50,000 new shares, 50,000 is 5 percent of a million. We consider this a small stock dividend. Let's assume the company decided to issue 400,000 new shares. Well, that's going to be a large. Why? Because 400,000 out of a million, they're adding 40 percent. 40 percent is here. Now, what do you need to know about small and large? When we issue a small stock dividend, so here's the key that you need to know. When we issue a small stock dividend, we record the issue at fair market value. And what's the assumption? Accounting based on the assumption that small stock dividend would have little effect on the market price of the outstanding shares. Okay? When we issue large stock dividend, which we'll see an example of both, we're going to record the issuance at par value. What does that mean? Wait until we have a number. Just remember, small stock dividend issue at market value, large stock dividend issued at par value. The best way to illustrate this is to work an example. Assuming Midland Corporation declares a 10 percent stock dividend. 10 percent is small. It means we're going to be using the fair market value of the stock on its 50,000 shares. So they have 50,000 shares and they're going to issue 10 percent. It means they're going to be issuing 5,000 new shares. The current fair market price is $15. Well, the fair market value of each share is $15 and that's relevant for us because it's a 10 percent. So what do we debit? We debit stock dividend. Now, in some textbook, you're going to see they debit, you're going to see that they debit retained earnings. That's okay, too. Okay? Because stock dividend is close and to retained earnings. And how much do we debit stock dividend? We debit it 50,000 times 10 percent, which is 5,000 times the market price, which comes up to 75,000. Then we credit an account called common dividend stock distributable, which is an equity account of 50,000. And we credit this account number of shares times the par value. This sounds like we are issuing common stock. Indeed, this common stock dividend distributable, it's going to be closed to common stock. Okay? And anything left is paid in capital. Anything left is paid in capital. So notice we have common stock now in our paid in capital section. We have common stock dividend distributable. As I told you, it's an equity account and we have paid in capital. That's fine. Now, when we actually issue the stock, when we actually issue the stock, we debit this account and we turn it into common stock. So simply put, as I told you, this 50,000, it's going to be eventually becomes common stock. So when we issue the stock, when we issue the stock to the shareholders, we give it to the, we give it to the, we give it to the owners. So the same thing happens. The same thing, I mean, the stock is actually issued. Now, let's take a look at the, at everything before and after. Before the dividend, we have 50,000 of common stock, total paid in capital, 50,000 retained earning is 300,000. Before dividend, we have total equity of 800,000, outstanding shares of 50,000 in the fair market value was $10. Let's assume we issued the stock dividend. So we issued 50,000 in additional 5%, I'm sorry, 10%, this is 10%. Okay. So we're going to be issuing, let's see, 75, actually 75,000 right here. Yes, that's 10%. We're going to be issuing an additional $75,000 and paid in capital, 50,000 went to common stock, 25,000 went to, went to paid in capital. So we're going to increase this equity, then we're going to be reducing retained earning because dividend comes out of retained earning. So we increase equity by 75, reduce retained earning by 75, the effect is zero. Now the outstanding shares went up by 5,000, we have more shares, but the effect is zero. Notice we have common stock after the dividend 550, paid in capital 25, total of 575, retained earning went down to 225. So before and after total equity is the same. The number of shares went up, but total equity is the same. Okay. Now there's an error here. The market value is $15, not 10. It was given S15. So we'll stick with it S15. Okay. Which of the following is true statement about small stock dividend? A debit to stock dividend for the par value of the shares issued, issued, should be made. The par value, now this is for large stock dividend. Small stock dividend decreased total equity. No, it doesn't decrease total equity. It just showed you equity is the same before and after. Market value per share should be assigned to the dividend share. And the answer is yes. Remember, if we're small, a small stock dividend ordinary will have no effect on par value. We'll have an effect on par value. It has no effect on par value. C is the answer. Okay. Let's take a look at this question now. In a stockholders' equity section, common stock dividend distributed is reported as what? So this account, common stock dividend distributable. Is it a deduction from total paid in capital and retained earning? Is it contra equity? Is it deduction? No. Is it a current liability? No, it's not. It's in the equity section. It cannot be a current liability. Deduction from retained earnings. No, it's not a deduction from retained earning addition to capital stock. Yes, it's basically, it's an equity account. It's an equity account. It's an equity account. Now, let's assume, let's assume for the sake of illustration, this was a, just for the sake of illustration, this was a large, let's assume this was a large stock dividend. So simply put, let's assume we issued, let's make it 40%. Let's assume we issued 40% stock dividend on our 50,000 shares, $10 par value common stock. Actually, I just made the mistake. The par value is $10. I read this as market value. The par value is 10. The par value is 10. The par value is 10. Sorry about that. I read it as market. Okay. So let's go back and change this example and assume we're going to be issuing 40%. 40%. So let's go ahead and start the computation. So we have 50,000 shares times 40%. We're going to be issuing 20,000 new shares, 20,000 times. Now, because this is a large stock dividend, we're going to multiply it by the par value, which is $10. So we're going to have $200,000. Therefore, we debit stock dividend, 200,000. We don't have paid in capital because we issued it exactly at par and we have common stock dividend distributable, 200,000. Then when we issue the stock, we debit common stock dividend distributable, then we credit common stock. So notice a large stock dividend will not have paid in capital. So large stock dividend, remember what I said earlier, a large stock dividend is recorded at par value. And this is what I meant recorded at par value. 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