Stock dividend – Different types. Small and Large Stock Dividends
In US GAAP, stock dividends are akin to bonus shares in India, entailing the issuance of additional shares of a company's own stock to its shareholders. The treatment of such dividends hinges on the percentage they represent in relation to the total shares outstanding prior to the dividend. There are two types: small stock dividends and large stock dividends.
For small stock dividends, where less than 20 to 25 percent of the previously outstanding shares are distributed, the issuance is deemed inconsequential to the market price of the stock. The fair market value of the stock dividend at the declaration date is moved from retained earnings to capital stock and additional paid-in capital (security premium). This results in no change to total shareholders' equity, with retained earnings being apportioned between Common Stock and Additional Paid-in Capital (Security Premium) via a journal entry of Dr Retained Earnings, Cr Common Stock, and Cr Additional Paid-in Capital.
Conversely, large stock dividends, distributing more than 20 to 25 percent of previously issued shares, may impact the market price of the stock, akin to a stock split. The par value of the stock dividend is typically shifted from retained earnings to capital stock to fulfill legal requirements. The amount transferred equals the number of shares issued multiplied by the par value of the stock. The journal entry for large stock dividends is Dr Retained Earnings and Cr Common Stock.
CA L.Muralidharan and CPA L.Mukundan
