Question

Richman Corporation has 120,000 shares of $5 par value common stock outstanding. It declared a 10% stock dividend on June 1 when the market price per share was $12. The shares were issued on June 30.

Perry Corporation has 120,000 shares of $5 par value common stock outstanding. It declared a 30% stock dividend on June 1 when the market price per share was $12. The shares were issued on June 30.

Prepare the necessary entries for the declaration and payment of the stock dividend. Why is it in Perry Corp the 36,000 shares is multiplied by 5 and not 12? What's the difference between these two problems that one has a paid-in capital step and the other doesn't?

Answer 1

Richman Corporation

Date	General Journal	Debit	Credit
June 1	Retained Earnings (120,000 × 10% × $12)	$144,000
	Common Stock Dividends Distributable (120,000 × 10% × $5)		$60,000
	Paid-in Capital in Excess of Par Value		$84,000
June 30	Common Stock Dividends Distributable	$60,000
	Common Stock		$60,000

Perry Corporation

Date	General Journal	Debit	Credit
June 1	Retained Earnings (120,000 × 30% × $5)	$180,000
	Common Stock Dividends Distributable (120,000 × 30% × $5)		$180,000
June 30	Common Stock Dividends Distributable	$180,000
	Common Stock		$180,000

Small stock dividend. A stock dividend is considered to be small if the new shares being issued are less than 20-25% of the total number of shares outstanding prior to the stock dividend.

On the declaration date of a small stock dividend, a journal entry is made to transfer the market value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.Recording small stock dividends A stock dividend of less than 20 to 25% of the outstanding shares is a small stock dividend and has little effect on the market value (quoted market price) of the shares. Thus, the firm accounts for the dividend at the current market value of the outstanding shares.

Large stock dividend. A stock dividend is considered to be large if the new shares being issued are more than 20-25% of the total value of shares outstanding prior to the stock dividend.

On the declaration date of a large stock dividend, a journal entry is made to transfer the par value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.

The accounting for large stock dividends differs from that of small stock dividends because a large dividend impacts the stock’s market value per share. While there may be a subsequent change in the market price of the stock after a small dividend, it is not as abrupt as that with a large dividend.There is no consideration of the market value in the accounting records for a large stock dividend because the number of shares issued in a large dividend is large enough to impact the market; as such, it causes an immediate reduction of the market price of the company’s stock.

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