Common Stock Dividend Distributable
Common stock dividend distributable is an account in the equity section of a company’s balance sheet that represents the value of common stock dividends declared by the company’s board of directors but not yet distributed to the shareholders. It is a temporary account that reflects the company’s obligation to distribute the declared dividends to its common stockholders.
When a company’s board of directors declares a stock dividend, new shares of common stock are created and distributed to the existing shareholders in proportion to their current holdings. These new shares are not distributed immediately but are set aside in the common stock dividend distributable account until the distribution date. Once the new shares are distributed to the shareholders, the balance in the common stock dividend distributable account is transferred to the common stock account, reflecting the increase in outstanding shares.
The common stock dividend distributable account is essentially a liability account for the company, as it represents an obligation to issue new shares to the existing shareholders. However, it is classified under the equity section of the balance sheet because it involves the distribution of ownership interests, rather than a cash obligation.
Example of a Common Stock Dividend Distributable
Let’s consider a hypothetical example to illustrate the concept of common stock dividend distributable.
Imagine Company ABC, a publicly traded corporation, has 2 million shares of common stock outstanding with a par value of $0.01 per share. The company’s board of directors declares a 10% stock dividend, which means the existing shareholders will receive additional shares equivalent to 10% of their current holdings.
First, we’ll calculate the number of new shares to be distributed as a stock dividend:
Number of New Shares = Number of Outstanding Shares × Stock Dividend Percentage
Number of New Shares = 2,000,000 shares × 10%
Number of New Shares = 200,000 shares
Next, we’ll calculate the value of the common stock dividend distributable:
Common Stock Dividend Distributable = Number of New Shares × Par Value per Share
Common Stock Dividend Distributable = 200,000 shares × $0.01
Common Stock Dividend Distributable = $2,000
Company ABC would record the common stock dividend distributable of $2,000 in the equity section of its balance sheet. This account represents the company’s obligation to distribute the declared stock dividend (200,000 new shares) to its existing shareholders.
Once the distribution date arrives and the new shares are issued to the shareholders, the balance in the common stock dividend distributable account ($2,000) would be transferred to the common stock account, increasing the total par value of outstanding shares. The new common stock balance would be:
New Common Stock Balance = Old Common Stock Balance + Common Stock Dividend Distributable
New Common Stock Balance = (2,000,000 shares × $0.01) + $2,000
New Common Stock Balance = $20,000 + $2,000
New Common Stock Balance = $22,000
After the distribution of the stock dividend, Company ABC’s common stock account on the balance sheet would show $22,000, reflecting the increase in outstanding shares due to the stock dividend distribution.