Question

1. Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend.

Answer 1

ANSWER

if any amount of retained earnings to be capitalized in connection with a stock dividend

When a business sees a net profit, it usually distributes these earnings among shareholders. It can, however, instead retain a portion of the earnings, capitalizing the profits to invest in further development. Rather than a cash dividend, stockholders receive a small stock dividend, which gives each of them more equity. The capitalization of retained earnings is a measure that describes this new stock as a percentage of the company's total existing outstanding shares

• Accounting for stock dividends varies depending on the size of the dividend. Small stock dividends are generally defined as payouts of less than 20% to 25% of the current number of the company's outstanding shares.
• For small stock dividends, the key distinction is that accounting adjustments are made using the stock's market value at the time of the dividend, rather than just the par value.
• To calculate the appropriate entries, take the number of shares issued in the stock dividend and multiply it by the stock price. That dollar figure will tell you the net reduction in the retained earnings line.

• That entry gets offset in two different ways. First, the common stock account will rise by an amount equal to the number of shares issued in the stock dividend multiplied by the par value of each share. That will typically take care of some but not all of the total reduction in retained earnings.

• The difference goes to the account for paid-in capital in excess of par. When you add together the two adjustments, they should give you the total value of the stock distributed in the dividend.