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What is a Small Stock Dividend?

Small Stock Dividend

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Small Stock Dividend

A small stock dividend refers to the issuance of additional shares of stock to shareholders at a proportion that is relatively small compared to the total number of shares previously outstanding. Generally, the threshold for what’s considered “small” varies by convention and accounting standards, but it’s often deemed to be a stock dividend that distributes less than 20-25% of the previously outstanding shares.

For accounting purposes, the treatment of a small stock dividend is distinct from that of a large stock dividend:

Accounting for Small Stock Dividend:

  • Determine the Fair Value: Unlike large stock dividends, the small stock dividend is recorded at fair market value (FMV) of the shares being distributed.
  • Transfer to Retained Earnings: The total fair market value of the dividend is transferred out of retained earnings. Specifically, you would debit (decrease) retained earnings for the aggregate fair market value of the additional shares.
  • Credit Common Stock and Additional Paid-in Capital: The par value of the shares is credited (increased) to the common stock account. Any excess of the fair market value over the par value is credited to the “Additional Paid-in Capital” account (or a similar equity account, depending on the terminology used in the specific accounting framework).

Example of a Small Stock Dividend

Let’s dive deeper with a comprehensive example of how a company might account for a small stock dividend.

Fictional Scenario:

PineTech Inc. is a growing tech company. They decide to distribute a small stock dividend to reward their shareholders without depleting their cash reserves.

Current Financial Data:

  • Outstanding shares: 100,000
  • Par value per share: $2
  • Market value per share: $10
  • Planned stock dividend: 10%

Steps:

  1. Determine the Number of Shares for Dividend: Given the 10% stock dividend, PineTech will distribute: 10% of 100,000 = 10,000 additional shares.
  2. Determine the Total Fair Market Value of the Dividend: 10,000 shares × $10/share (market value) = $100,000
  3. Accounting Entries:

To account for this dividend, PineTech would make the following journal entries:

  • Debit (Decrease) Retained Earnings for the total market value of the dividend: $100,000
  • Credit (Increase) Common Stock for the total par value of the new shares: 10,000 shares × $2/share = $20,000
  • Credit (Increase) Additional Paid-in Capital for the excess of market value over par value: $100,000 (total market value) – $20,000 (total par value) = $80,000

Journal Entry:

DateAccount TitleDebit ($)Credit ($)
2023-08-22Retained Earnings100,000
Common Stock20,000
Additional Paid-in Capital80,000

This journal entry indicates that PineTech has moved $100,000 from its retained earnings to its common stock and additional paid-in capital accounts to account for the small stock dividend.

Shareholders of PineTech, in this scenario, would now have additional shares in their portfolio due to the stock dividend, and the company successfully rewards its shareholders without utilizing its cash reserves.

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