Question

3) SSC declares and issues a stock dividend. That is, SSC is not paying cash to stockholders. Rather, SSC is distributing additional shares to stockholders on a proportional basis. a) What is meant by distributing shares on "proportional basis"? b) Why would a company issue additional shares of stock to stockholders rather than paying a cash dividend? c) if a SSC stockholder receives shares of stock in regard to a stock dividend, does the SSC stockholder own a larger proportion of SSC? d) How is a stock dividend valued? e) SSC has 200,000 common shares outstanding, $1.00 par value, and SSC has declared a 12% stock dividend. Currently, SSC common stock is trading on the New York Stock Exchange at $57.00 / share. How many shares will be issued in regard to the declared stock dividend? f) What will be the grand total value, according to the accounting records, of the stock dividend? g) What is the accounting journal entry to record the stock dividend?

Answer 1

a) Shares are distributed in proportion to their shareholding. For Example If "X" a shareholder holds 1000 shares in a company having 100000 shares and such company is issuing 100 shares as dividend on proportional basis.Number of shares received by Mr.X would be 1 Share (100*1000/100000).

b)Stock dividend distributions do not affect the market capitalization of a company.Stock dividends are not includable in the gross income of the shareholder for US income tax purposes. Because the shares are issued for proceeds equal to the pre-existing market price of the shares; there is no negative dilution in the amount recoverable.

c)No because stock dividend is generally distributed on proportional basis. Hence it does not change the Percentage of Stock Holding in the SSC by such Stockholder.

d)Stock Dividend is valued based on dividend discount model

Stock value = Dividend per share / (Required Rate of Return – Dividend Growth Rate)

e) Number of shares issued in regard to declaration of stock dividend are 24000 shares(200000*12%).

f)Grand total will be 1,368,000 (24000 shares*57).

g) Journal Entry for issue of stock dividend is

Particulars        Debit Credit

  Retained earnings 1,368,000     

Common stock, $1 par value 24,000    

Additional paid-in capital 1,344,000