Oh I found something — I share below
A stock dividend converts a portion of Retained Earnings to Common Stock. As an example, if you are the owner of 100 shares of ABC common stock, and ABC declares a 10% dividend, you will receive 10% of the number of shares you already own, and will then have 110 shares. Whether you are actually better off from this transaction is debatable. Most stockholders would happily accept the additional shares, knowing that they could sell them for cash.
Note that any dividend, whether cash or stock dividend, involves a debit to Retained Earnings, indicating that Retained Earnings is decreased.
Stock Dividends Example
Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10 par value common stock. The current fair market value of each share is $15.00. A total of 5000 shares will be issued — 10% of 50,000 shares. But the critical question is, should Retained Earnings be debited for the par value of the shares to be distributed, or the market value? The rule is: if the stock dividend is small (less than about 20%-25%), Retained Earnings is debited for the fair market value of the shares to be distributed:
JE
DR RE 75,0000
CR C/S…………..50,000
CR APIC…………25,000
Later, when the stock is actually issued, the following entry is made:
DR C/S Stock dividends Distribution 50,000
CR C/S…………………………………………………………50,000
These two entries could be combined into one entry, by debiting Retained Earnings, crediting Common Stock, and crediting Paid in Capital in Excess of Par.
The treatment above is appropriate for small stock dividends (those less than 20-25% of the total shares issued). Notice that there are no assets or liabilities involved in a stock dividend. The effect, therefore, is to convert an amount of Retained Earnings to Paid in Capital. Thus, the number of shares outstanding increases, and the book value per share would decrease. The use of market value for the stock dividend is appropriate if the distribution of shares will not drive the market price down appreciably. A main reason for issuing stock dividends is to maintain investor sentiment toward the company's stock without using cash. On the other hand, the number of common shares outstanding will increase, which may have an undesirable effect on the company's Earnings Per Share (EPS).
Stock Split
Sometimes a company will declare a stock split. A split reduces the par or stated value of the stock and increases the number of shares outstanding proportionally. Example: a company's $10.00 par stock is split 2 for 1 when there are 1000 shares of stock outstanding. After the split, there will be 2000 shares outstanding, with a par value of $5.00. Total Paid in Capital, Retained Earnings, and Total Stockholders' Equity remain the same. No assets or liabilities are affected. A memo entry would be sufficient in the journal to note the stock split. Note that no Stockholders' Equity accounts change in dollar amount. The par per share is halved, and the number of shares is doubled. The Common Stock had a balance of $10,000 before the split (1000 shares * $10), and will have the same balance after the split (2000 shares * $5).
Why would a company execute a stock split? The usual reason is that the company's shares are trading at a high market value, which may reduce the volume of shares traded. For example, a computer software company issues shares of stock at $15 per share. The company experiences rapid growth and finds that its volume of shares traded among investors is 100,000 shares per day. As the company continues to be successful, the price of the stock rises to $60 a share, and later, rises to $70 per share. The company discovers that as the price goes higher, the volume of shares traded is reduced–perhaps to 40,000 shares traded per day. To keep the shares actively trading, the company executes a 2 for 1 stock split. This doubles the number of shares outstanding, and the price per share should fall to about $35 per share. The volume of shares rises, as stockholders can get a good quantity of shares for their investment.
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