 In this presentation, we will record the journal entry for a stock dividend. We're going to record that information here into the general journal. Then we will post that to not the general letter, but a worksheet. Worksheet will have the beginning trial balance. We'll enter the transaction here and then have the ending trial balance. The benefit of the worksheet is it will give a really quick example of the effect on the accounting equation, the effect on individual accounts. The trial balance is in order as all trial balances are, assets in green, well they're not all color coordinated, but they're all in order, assets and then liabilities, and then the equity, then revenue and expenses. Our assets are going to be in green, then the liabilities in orange, then the equity in light blue, and the revenue and expense income statement accounts in dark blue. Debit are going to be non-bracketed, credited bracketed, debits in other words positive for Excel, and credits negative for Excel, debits minus the credits are going to equal zero. In other words, debits equal the credits, that's what that zero represents. We currently have nothing in the revenue or expenses here as we start this problem. This of course is just a very simplified type of worksheet, but it gives us an idea of the balancing mechanism and a good idea of the types of accounts that are affected. We always want to think about what is the effect here? Asks liabilities equity affected is net income affected or temporary or just permanent accounts affected whenever we go through this process and some type of balancing method will help with that. We of course will be concentrating here on the equity section, that being what differs from a corporation to something like a partnership or sole proprietor, the equity section being broken out in terms of who we owe or how much was invested in terms of common stock. This being generated from the investment, par value, the common stock, par value and additional paid in capital versus the earnings that have accumulated over times over and above the initial investment, less any kind of dividends, any kind of returns on investment given back dividends to owners, stockholders. Now we have a 10% stock dividend when stock is selling for $15. Now we're going to give a dividend, but instead of giving just a normal cash dividend, we're going to give stock. So we're going to have to figure out, okay, we're going to give away basically our own stock to the people that already own our stock. So in theory it makes sense because all we're doing is just like anything else, we're going to give something of value to the stockholders. But of course it causes some problems because one, if we give away cash, it's easy for us to know what the value of cash is, cash is cash. But if we give something else away in terms of a dividend rather than cash, we have to somehow value what we gave away. In this case we're giving away an interest in our company, a future equity interest in the company. And we're giving it away to current owners of the company. So how are we going to figure out what that is going to be? That's going to be kind of the question. Now, first question we ask whenever we do a journal entry is, is cash affected? In this case we're going to say no, cash is not affected because we're not going to pay cash and even if we were, remember that first we have to basically declare the dividend before we pay it. So cash won't be affected. What we're really doing is giving away the retained earnings. So we could make another account kind of like a draws account similar to a draws account which would be a dividend account that we can track over time and then close out at the end of the time period in a similar way as draws. Or we may as we will do here just record the dividend to retained earnings. In other words, retained earnings represents what is owed to the owners or the net value in the company or the accumulation of revenue I should say in the company over what has been distributed in terms of dividends up to this point. We're going to distribute more of it. We're going to reduce retained earnings. We're going to reduce the value of the company over and above the initial investment. In other words, assets minus liabilities is $1,368. All of equity is $1,368 assets minus liabilities equal equity. The $600 and the $110 is what was initially invested when we sold the stock. The $658 is the accumulation of revenue less what has been distributed. Okay, so we're going to take that and reduce it. So we're going to debit earnings, retained earnings. It has a credit balance. We're going to do the opposite thing to it. Debit it. So I'm going to copy that. We're going to put that up top and B2 right click and paste 123. Now, what's going to be the amount that we debit it for? We're going to take out the trustee calculator and it says it's a 10% stock dividend. So first question is how many stocks are outstanding? So we see that there's $600,000 par value. So we can take that $600,000 divided by five. There's 120 shares outstanding according to that calculation. So 120 shares outstanding. And then we're going to say that there's a 10% stock dividend. So we're just going to take that 120 multiplied by 10% which is .1. Like is a 12,000 and then 12,000 in essence shares that we're going to be distributed. And then we're going to multiply that times the stock price. So it's currently selling for $15. How would we know what that is? If it's a publicly traded stock, then the stocks wouldn't always be selling by us. We wouldn't be issuing them to the stock exchange all the time, but people will be selling stock. If you think of stock like Apple or something like that, then people are selling them all the time. The company isn't issuing stock all the time. They're not selling new stock all the time. But the stock itself is trading all the time and therefore we have a pretty ready number in those cases for publicly traded stock of what the value of it is. So we're going to take that 12,000 times the 15 and that gives us 180. So we'll do that once again here. Or in C2, we're going to say this equals the 120,000 shares times the 10% stock dividend times the $15 value and that will give us 180,000. That's what we're going to reduce the retained earnings by. Now what are we giving away? We're not giving away cash, so we're not going to credit cash here. It's not a cash dividend. And even if we were, we wouldn't have, like we said, we wouldn't have been paying it yet. It would go into a payable. What we are going to give away is common stock. So we're going to give away equity interest in the company. In other words, we're kind of saying, we're basically, it would be similar to us saying that if we had paid the cash dividend and then the owners took that cash dividend and just turned around and reinvested it, that's kind of like what's happening here. So you would think it would go into the paid in capital in excess of, I mean sorry, you would think it would go into the common stock of $5 par value and then the paid in capital, these two accounts. But at this point in time, remember, we haven't actually issued the stock just like with a cash dividend. It's going to take us a little bit of time for us to actually go through the process of issuing the stock. At this point in time, we're going to say that, hey, this is going to happen. We've committed to it. We're taking it out of retained earnings at this time representing the fact that we're going to make this dividend happen. But we haven't issued the stock yet. We're going to do that at a later time and therefore we owe it. So we have a common stock dividend payable versus here, which is a common dividend payable. This will be a cash dividend payable. So this is going to be the issuance we owe stock. This would be the issuance we're going to owe cash. So here we're going to say we owe something in the future. It won't be cash. We owe the issuance of stock in the future. It's a liability. Liabilities have credit balances. We're going to make it go up by doing the same thing to it. Another credit. So I'm going to right-click and copy that. We're going to put that in B3, right-click and paste 1, 2, 3. Now, so again, this is a little bit tricky because we can't really see that it's going like normally we see it's going to the common stock and then the excess is going to additional patent capital. This is going to common stock dividend distributable because it will eventually go to the common stock. But it's not there yet. Because we haven't distributed it yet. What we owe though is going to be the common stock at the par value, not the additional paid in capital. In other words, if you thought about this as like a normal kind of stock issuance like the company selling stock, we would have gotten cash, debiting cash, then we would credit the common stock at the par value and then credit the additional paid in capital. In this case, the owners, the company is giving the stock away in terms of giving the owners of some of their value back rather than in cash through the retained earnings. So we're decreasing the retained earnings. We're going to credit the paid in capital or the common stock at some point, but right now we're substituting the payable yet because we haven't yet gotten there. So we're going to put this on the books, in other words, at par value. To do that, we're going to take, remember this 600,000, we're going to multiply that or divide it by the par value of five. That gives us 120,000 shares that are out there again. If we multiply that times 10% times 0.1, that gives us the 12,000 shares we're going to issue. And then we're going to multiply that times the par value rather than the market value times the $5. That gives us 60,000. So let's do that again here. We'll do that in Excel. Instead of equals, I'm going to put a negative in D3, negative of the 120,000. That's how many shares are currently outstanding, 600,000 divided by five, times 0.1, 10% dividend, which will give us the number of stocks that we're going to issue, times rather than the market value of 15, the par value, five. That gives us our 60,000. Then the difference between these two, the 180 minus the 60, is what we need in the credit side here. So we'll do our plug formula, our negative SUM, double click the sum of the 180 minus the 60, and that gives us 120, the 120 plus the 60, of course, giving us that 180 over here. What are we going to put that 122? That goes to the additional paid-in capital. So here's the additional paid-in capital. It has a credit balance. We're going to increase it. So we're going to right-click on it, copy, put that in B4, right-click and paste 1, 2, 3. So this is kind of a confusing journal, and we can think about it as a comparison between two other types of transactions, one, the issuance of stock, and the other a dividend, a normal cash dividend. So if you compare it to the issuance of stock, we would normally debit the stock or debit cash that we would have got if we were to sell stock. So that would be a debit here to cash. We're going to put it to retained earnings here because this is going to be a dividend. And then we would credit the common stock for the par value amount of it. And then the additional paid-in capital for anything over and above that. So this is similar to that, except that instead of getting cash, we're distributing earnings. And then we're crediting the common stock payable or distributable liability because it's the same as what we're going to do here for the common stock, but we haven't done it yet. We just have to go through the bureaucracy of doing the issuance yet, which hasn't yet happened. So this is going to be the same amount or the same calculation, but a different account until we actually distribute, which we will do at a later time. And then the paid-in capital being the same amount as would be if we distribute the common stock for cash at the market value price. This transaction being similar to just a cash dividend in that the retained earnings is going to go down. And then instead of crediting the cash, which we wouldn't do, remember, we would credit the cash dividend payable, the liability, until we pay it at a later time. So those are the two kind of comparisons you can think about, which are usually more easy than this transaction that might help. So we're going to post this out then. Here's retained earnings in the trial balance. I mean, here it is on the journal entry. Here it is on the trial balance. We're going to be here in cell H16, where we will say equals. Point to that 180, bringing the 658,000 down by 182,478,000. Here's the cash dividends, distributable, a liability. Here it is on the trial balance. We're going to be here in H11, where we will say equals. Point to that 60,000, bringing the balance up from zero to 60,000. And then we've got the additional paid in capital. Here's the additional paid in capital on the trial balance. We're in H13, where we say equals. Point that 120 and enter, bringing the balance up to 230,000. Now, what's going to happen, and that puts us, of course, back in balance here. There's no effect on net income from this transaction. It's just like a normal dividend. We're taking it out of the equity section here, and the other side, instead of us paying out cash, we're giving an equity interest. So the ultimate type of thing that's going to happen is it's all going to be in retained earnings, meaning we're moving it from the earnings side, what has been earned over and above, to the investment side. As if, basically, we gave the cash to the owners, and then they reinvested it at the market value at the same time. So at some future point in time, then, of course, we're going to distribute the stocks that we promised to distribute. So we're going to record that side of it now. We're going to say, OK, now we're going to distribute the stock. Is cash affected? No. We're going to distribute common stock. That's what's going to happen. And so the distributable amount, the liabilities, is going to go down. So we owe $60,000, not cash, but common stock. We're going to make it go down, doing the opposite thing to it, a debit. So we're going to copy that, right-click and copy. Then we're going to go up top. I'm going to put this in B6, right-click and paste 1, 2, 3. This is what's going to happen when we actually distribute the stock. That's going to be for the $60,000 that we owe in stock, $60,000 worth of stock at the par value. And then we're going to credit the same amount, $60,000. Credit of $60,000. And then we're going to issue the common stock. Here's the common stock. So it has a credit balance. We're going to make it go up by doing the same thing to it, another credit, right-click and copy. We'll put that up top in B7, right-click and paste 1, 2, 3. So here's the second transaction we'll have when we get through the bureaucracy of actually processing the stock. Here's the common stock, dividend distributable. Here it is on the trial balance. We're going to be in cell H11. Double-click on it. Go to the end of it. Plus, point to that $60,000, bringing the $60,000 credit down by $62,000. Then we're going to go to the common stock $5 par. Here it is in the journal entry. Here it is in the trial balance. We're here in H12, where we say equals. Point to that $60,000, bringing the $600,000 up by $60,000 to $660,000. So we're back in balance here. Still no effect on net income. And now we see the ultimate effect of this transaction of the stock dividend, meaning all we did was basically take it out of. This whole dividend section, this whole equity section, represents what's owed to the owner, $1,368, which is assets minus liabilities, $1,368, all we did was say, we're going to take it out of the amount that is over and above the initial investment, meaning the accumulation of revenue, less any dividends in the past. We're going to take it out of there, and we're basically going to put it into the common stock part and the additional paid capital representing investment. And that's because it's kind of like we took the cash out. We took the revenue that was generated, the retained earnings. We took it out of there. And it's similar to us giving the cash to the owners and then saying, OK, I'm going to take that cash and buy the common stock at the current market value. That's basically what we ended up doing here. And so we just took it out of what was earnings over time. And we increased it to the common stock, which represents basically the initial investments from owners. If we take a look at the equity section over here on the statement of stockholders' equity, we're going to say the common stock now still has a $5 par value. We could issue 150 shares. That's what's authorized. How many are out there now? Well, it's changed because it was $600,000 divided by 5 or $120. Now it's $660,000 divided by 5 or $132,000. So the amount of shares outstanding is $132,000 has changed now. And then the amount here in M10, I'm just going to take the negative of that $660, negative of this $660. The additional paid in capital is just going to take that $230, negative of this $230. I'm going to sum those two up, but this is kind of like the initial investment then from the owners equals the sum of these. And that's kind of the funny part here. Like the initial investment went up, even though no new cash was received. How did it go up? Because we took out the retained earnings and, in essence, distributed it into more initial investment rather than giving cash. So with the retained earnings then goes down. We're going to pick up that retained earnings with a negative of that number. And then we'll just sum these two up equals the sum of the $890 and the $478 or the $1,368. So again, this represents if we had one person own all the company, own all the stock, the company then would be worth or have a book value or owe the stockholder $1,368, which represents assets minus liabilities $1,368. And then it's broken out by the amount that was originally invested, which is the common stock in the opiate and capital, to the earnings over and above the original investment, which represents is represented by retained earnings. What we did here is increase the amount of the original investment by reducing the earnings over and above and basically reinvesting it in the company.