 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 in 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 in proportion of your shares. So this is what it is. So a 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. 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. 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 distribute them 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 they 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 gonna happen is this, if the issue is a new small, 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 on your exam, the test, whoever wrote the test, they don't tell you it's a small or a large. They will tell you they issue 18,000 shares. You have to understand 18,000 is 18% 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 gonna 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 shares, but the amount is small. It's not gonna make any change to the stock price. Now, if we consider the new stock dividend as a large stock dividend, let's assume we're issuing 35,000 new shares, what's gonna happen is we're gonna 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 gonna 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 gonna 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. First way to illustrate this is to look at an actual example. Adam company has $10,000 par value common stock outstanding. The board of directors decided to issue 1,000 in stock dividend. The fair value of the share is $16. Now, the first thing you want to understand is this. They're issuing a new 1,000 shares and this is 1,000 divided by 10,000 existing shares. This is a 10% stock dividend. This automatically tells us we are dealing with a small stock dividend. Now on the CPA exam or on your exam, they may not mention this is a small stock dividend. So you have to understand what would happen when you have a small stock dividend. When you have a small stock dividend, we capitalized retained earnings for the market value of the shares. In simple words, we reduce retained earnings for the number of shares issuing times the fair value, the fair value is giving. So we debit retained earnings 16,000. This is what we mean by capitalizing retained earnings for the market value. Then we are going to credit a new equity account called common stock dividend, dividend distributable. Think of this account as it's an equity account. So it's an equity account. That's the first thing I want you to know. But this is the account that's pre-requisiting common stock. It's the account that's gonna come before you issue common stock. So notice it's common stock dividend to be distributed. So this is an equity account. Therefore, if it's what's gonna proceed common stock, it means you're gonna take the number of shares you are issuing times the par value, which is you are issuing 1,000 shares times 10. So this is $10 par value. So this is par value times 1,000 shares. We'll give us 1,000. And the remaining is additional paid and capital. Paid and capital in excess of par value, which is a plugin of 6,000. So this is the entry that you make when you declare the shares. Now, this is the declaration date. Now you're gonna issue the shares. But before you issue the shares, let's update our stockholders equity. Now we have a new equity account called common stock dividend distributable. And it's equal to 10,000. We still have common stock equal to 200,000. Now additional paid and capital, we increased it by 6,000, the 6,000 here. And retained earning was reduced by 16,000. So simply put, we took 16,000 out of retained earning, 10,000 of it. Now sitting in common stock dividend distributable and eventually it's gonna go up to common stock and we added 6,000 to additional paid and capital. Now we're gonna go ahead and issue the stock. We're gonna debit and notice nothing happened to total equity 700,000, 700,000. Now we issue the stock, we distribute the stock, we debit, common stock dividend to be distributable. This equity account will reduce it and we increase. So this account is gone. Notice what happened? This account is gone, this 10,000 is gone. And we credit common stock. So this becomes, it goes from 200 plus 10,000, it becomes 210,000. Again, the total is the same. All what we did is we took 16,000 out of retained earning and gave it to the shareholders. 10,000 went to common stock, 6,000 went into paid and capital. Let's change the example a little bit. Adam company has 10,000 shares, $10 power value. The board of directors decided to issue 4,000 shares of stock dividend. Now, well hopefully we know that 4,000 divided by 10,000 equal to 40%. 40% means we are dealing with a large stock dividend. Again, they may not tell you this information. They may just say, do you know that you're dealing with a large stock dividend? The fair value of $16, I don't care about the fair value here because the fair value is irrelevant because I am going to capitalize, I'm going to debit, I'm going to reduce retained earning, the number of shares times the power value. Number of shares times the power value is $10, which is gonna give me 40,000. So 4,000 times $10 is 40,000. Then I will credit common stock dividend to be distributable, 40,000. All what I did is I reduced retained earnings by 40,000 and included a new account here. Added a new account of 40,000 and reduced this by 40,000, increase this by 40,000. That's all what I did. Nothing have changed. Now I'm gonna go ahead and issue the stock. When I issue the stock, I'm gonna debit this account and credit common stock. I don't have paid in capital. So this is gonna be gone. This 40,000 will be gone. And it's gonna be added to what? It's gonna be added to here. This 40,000 went up from here to here. Added 40,000 to common stock. And I'm still in the same boat. All what I did is I took 40,000 out of retained earning and gave it to the common share holders. That's all what I did. What should you do now? Go to FARHAT lectures, work MCQs, true, false, additional resources. That's gonna help you understand this concept better. Whether you are a college student or a CPA candidate, invest in yourself, invest in your career. Subscribe, invest in your education. It's gonna pay dividend down the road. Good luck, study hard, and of course, stay safe.