 Hello and welcome to the session in which we would look at a stock dividend example. We are giving the data for Aram company, we are giving the stockholders equity and we're giving the selling price for the stock. So Aram company stock is selling currently for $40 per share, that's the market price and the stockholders equity which is the balance sheet is as followed. Common stock, $10 power value, Aram has 400 shares issues and outstanding which is $10 times 400,000 shares gives us the 4 million. Paid in capital and access of power common stock is 1.3 and retained earning is 600,000. In this example Aram company will issue a 15% stock dividend, they will issue a 90% stock dividend and Aram company will declare two for one stock split. And what we're going to do, we're going to look at the journal entries and how do we come up with the figures when we need to journalize a stock dividend as well as a stock split. Before we proceed any further I have a public announcement about my company farhatlectures.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. Now this topic as it is presented right now could be given as a CPA simulation on the CPA exam or this could be an exercise in your intermediate accounting course. Regardless we're going to go ahead and try to resolve this problem. Starting with Adam company issued 15% stock dividend. Now the first thing you want to know is 15%. What does the 15% means? It means the stock dividend is considered a small stock dividend because we have a large stock dividend and a small stock dividend. So the first thing you want to differentiate between those two because the way you treat, the way you journalize, the way you capitalize, retained earning, how much you would reduce retained earning will depend on the amount of the dividend. Is it a small or is it a large? Now how do we determine whether a stock dividend is a small or a large stock dividend? If the stock dividend is 20 to 25% we consider it small and obviously if it's a greater than 20 to 25% we consider it large. Now you might be saying what about if it's between 20 to 25% you'll make a judgment but usually they don't give you this type of questions on the CPA exam just know we are dealing with a small stock dividend. So what do we have to do when we are dealing with a small stock dividend? Well the first thing we have to do is we have to compute how many new shares are we issuing. So right now we have 400,000 shares outstanding and we're going to be issuing 15% additional shares and those additional shares will be given, will be given to the shareholders distributed proportionately to the shareholders. Well if we take 400,000 shares right now times 15% we issue 60,000 new shares. Now if you own 10% of the stocks you'll get 10% of the 60,000 if you own 1% of the 400,000 you'll get 1% of the 60,000 so it's distributed proportionately. Now we are dealing with the journal entry we need to journalize this dividend. How much do we debit retained earnings? Remember retained earnings is the account that dividend comes out of so it's going to reduce retained earnings. Well for small stock dividend and you need to know this we are going to use the market value per share. It means we're going to take the 60,000 new shares we issued we're going to multiply it by 40 dollars. What does the 40 dollars represent? The market price of the share which will give us a debit retained earnings of 2.4 million. Now for every debit we need a credit. We're going to credit first an account called common stock dividend to be distributed or distributable 600,000 which is the number of shares times 10 dollars it's the same way as we credit common stock but right now we have not distributed the stock therefore we have it in this account called common stock dividend distributable. Now this is an equity account this is not a liability this is an equity account and any remaining will be credited to additional paid and capital common stock so here's what I want you to notice when it comes to stock dividend. We reduced retained earnings which is equity then we increase two equity accounts for the same amount simply put we reduced equity by 2.4 million we increased equity by 2.4 million what happened to the company overall net effect there's no net effect on equity there is no net effect on the balance sheet. What I'm trying to say is this in contrast to cash dividend in contrast to property dividend stock dividend do not reduce your equity all what you are doing all what we did is this kind of if you want to look at it from a business perspective we took this we took part of the retained earnings which is part of the 6 million in retained earnings we took 2.4 of it and we distributed to the shareholders that's all what we did so overall the equity of the company is the same the equity of the company now the equity the individual equity of the shareholders of course they're going to be very busy they're going to be very busy they're going to be very happy not very busy very happy that they receive the additional shares. Now when we issue the actual shares we're going to debit common stock dividend distributable and we're going to credit common stock so let's see what happened overall let's take a look at the final picture so common stock dividend to be distributed is basically gone all what we did is we issued stocks we credited common stock credited paid in capital and rather than receiving cash what happened is the company debited retained earnings so we used the retained earnings to do what to compensate to reward our shareholders and this is a an example of a small stock dividend now let's assume the company issued 90% stock dividend well the first thing we have to know is how many new shares are we issuing well if we have 400,000 shares and this is independent from the prior one so we're not assuming that we have the additional shares we're going back to the original example 400,000 times 90% we're going to be issuing 360,000 new shares well again the question is how much do we debit retained earnings well for a large stock dividend we debit retained earnings for the par value therefore we're going to take 360 times 10 equal to 3.6 million that's that's the debit to retained earnings and we are going to credit common stock dividend distributable simply put we don't have additional paid in capital because we are issuing the stock dividend exactly at par so that's it it's two entries only then when we actually distribute the stock to the shareholders we are going to debit common stock dividend distributable so this is basically gone and we're going to credit regular common stock so basically what end up happening we issued stocks and we reduced retained earnings the same concept as before we reduced an equity account and we increased an equity account no effect overall now adam company declared two for one stock split what's the journal entry no entry all what we did here is we declared two for one stock split it means if you have one stock you're gonna have two now here's what's gonna happen so the outstanding shares of the company they they don't they're 400,000 they're gonna become 800,000 hold on a second if this 800,000 what's gonna happen to this number well if we double the number of shares we have to cut the par value in half so now we're back to the same where we are five dollars times 800,000 equal to 400,000 in common stock there is no entry the company will issue a memo and the shareholders would receive additional shares and the other thing that happens to the stock price becomes 20 as well so the shareholders immediately not better off because everything is adjusted but hopefully in the future the stock price will go up and they will have more shares what should you do stock dividend is extremely important topic on the CPA exam extremely important topic in your accounting courses go to far hat lectures and learn about stock dividend large stock dividend small stock dividend stock split because those topics are covered and you need to be comfortable with them good luck study hard and of course stay safe