 Hello and welcome to this session in which we would look at an example of stock dividend. The stockholders' equity of Adams Company have the following balances as of December 31st, 2021. Common stock, $2 par value, half a million shares, total of a million, paid in capital, and excess of par, common stock, $3.2 million, and retained earning is $7.8 million. All in all, the total equity for this company is $12 million. The market value of Adams stock is $28. We're going to issue a 10% stock dividend, then we're going to issue an 80% stock dividend to an independent situation, and we're going to do two-for-one stock split. We're going to perform the calculation, we're going to journalize the entries, and see the effect on stockholders' equity. Before we proceed any further, I have a public announcement about my company, Farhat Lectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. So let's go ahead and get started, starting with a stock dividend of 10%. Well, what you need to know is this. When it's a 10% stock dividend, it means it's less than 20 to 25% of the outstanding shares, it's 10% obviously. We consider this a small stock dividend. Anything that's greater than 20 to 25% is considered a large stock dividend and there's a different treatment, whether it's a small or a large. So I'm going to start with a small dividend to illustrate the concept. Well, right now we have 500,000 shares outstanding, 500,000 shares. If we are issuing 10% new shares, that's going to be new additional 50 shares. Now, how much are we going to capitalize retained earnings? In other words, how much are we going to be reducing retained earnings by? Well, if it's a small stock dividend, we need the market value. So we're going to reduce the retained earnings by the number of shares times the market value on that date, which happens to be $28. Therefore, we're going to reduce retained earnings by $1.4 million. That's fine. So what's the entry that we make? Well, we're going to debit retained earnings by $1.4 million. We are going to credit an account called common stock dividend distributable, which is an equity account. And we're going to credit this account like the way we credit common stock, which is the number of shares we're issuing times the par value, which is 50,000 shares, because this is going to become common stock times to 100,000. And everything else goes to paid and capital common stock, which is also an equity account. So notice what happened. We reduced equity by $1.4 million. We increased equity in total by $1.4 million. So what happened to this $12 million? The $12 million remained $12 million. All what happened, $1.4 million left retained earnings. And notice it's going to go to common stock and paid and capital. So when we issue the stock, we're going to remove common stock dividend distributable by debiting common stock dividend distributable and crediting common stock. So what happened overall? Overall, what happened is this. We took $1.4 million from retained earning. We allocated $100,000 of it to common stock and $1.3 million to paid in capital. So what happened to the total? The net effect is zero. We still have $12 million of equity. So this is the entry in the computation and the effect on equity when it comes to a small stock dividend. Now let's take a look at a large stock dividend. Well, let's kind of erase this because we need to do this as an independent scenario. Now we are assuming we are issuing an 80% stock dividend. Well, we're going to take half a million times 80%. And that's going to give us 400,000 new shares. Now, how much are we going to debit retained earnings based on this scenario? If it's a large stock dividend, we don't care about the fair market value. We will use the par value and the par value happens to be $2. So we are going to reduce retained earnings $800,000. Then we're going to credit common stock dividend distributable for the same amount because we have no additional paid in capital because the shares were issued exactly for the par, which is $2. So what did we do? We reduced retained earnings by $800,000. And when we issued the stock, we removed this account and we issued the stock, credit common stock. So what we did is we took $800,000 out of retained earnings and add it to common stock. And what happened? The net effect on equity is zero. What does that mean? It means equity is still $12 million. So paying dividend stock don't affect our equity. In contrast, to cash dividend under cash dividend, yes, indeed, because under cash dividend, you reduce your cash and you reduce your equity. So your equity goes down if it's cash because you pay them in cash. When you give them stock dividend, when you give them means the shareholders, you reduce your retained earnings because dividend always comes out of retained earnings, but you increase equity. So there's no difference. It's very important concept or very important point to remember. How about a two for one stock split is declared and issued? Well, what's going to happen is this, for every share, you're going to receive two shares. Now, how would that be reflected in the real world? Well, for one thing, the the market price of the share will adjust. The market price becomes 14 because now you have your shares are double, the market price will automatically adjust. But from an accounting perspective, what do we have to do? There is no entry from an accounting perspective. There is no journal entry. What's going to happen is this, the $2 becomes a dollar, the par value becomes a dollar, and the 500,000 shares, we double them, they become a million. So $1 times a million equal to a million. There's no entry. And if you own 10 shares before, let's assume you happen to own 100 shares before the price was 28. So your value is 2,800. Now you own 200 shares. The price of the share is 14. You still have a value of 2,800. So even if you own those shares, the market value does not change because the stock price will adjust. What should you do now? Go to forehead lectures and look at additional MCQs through false additional exercises. That's going to help you understand stock dividend, the equity section of the balance sheet. Good luck, everyone. Study hard, invest in yourself, and of course, stay safe.