Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 11 Stockholders’ Equity: Capital Stock and Dividends 507

No entry is required on the date of record, December 10, since this date merely de-

termines which stockholders will receive the dividend. On the date of payment, January

2, the corporation records the $42,500 payment of the dividends as follows:

If Hiber Corporation’s fiscal year ends December 31, Cash Dividends Payable will be

listed on the December 31 balance sheet as a current liability.

If a corporation that holds treasury stock declares a cash dividend, the dividends

are not paid on the treasury shares. To do so would place the corporation in the posi-

tion of earning income through dealing with itself. For example, if Hiber Corporation

in the preceding illustration had held 5,000 shares of its own common stock, the cash

dividends on the common stock would have been $28,500 [(100,000 5,000)$0.30]

instead of $30,000.

Stock Dividends

A distribution of shares of stock to stockholders is called a stock dividend.

Usually, such distributions are in common stock and are issued to hold-

ers of common stock. Stock dividends are different from cash dividends,

in that there is no distribution of cash or other assets to stockholders.

The effect of a stock dividend on the stockholders’ equity of the is-

suing corporation is to transfer retained earnings to paid-in capital. For

public corporations, the amount transferred from retained earnings to

paid-in capital is normally the fair value(market price) of the shares is-

sued in the stock dividend.^9 To illustrate, assume that the stockholders’

equity accounts of Hendrix Corporation as of December 15 are as follows:

Common stock, $20 par (2,000,000 shares issued) $40,000,000

Paid-in capital in excess of par—common stock 9,000,000

Retained earnings 26,600,000

On December 15, the board of directors declares a stock dividend of

5% or 100,000 shares (2,000,000 shares 5%) to be issued on January 10

to stockholders of record on December 31. The market price of the stock

on the declaration date is $31 a share. The declaration is recorded as

follows:^10

9 The use of fair market value is justified as long as the number of shares issued for the stock dividend is

small (less than 25% of the shares outstanding).

10 Alternatively, the debit could be to “Stock Dividend,” which is then closed to Retained Earnings.

The stock dividends distributable account is listed in the Paid-In Capital section of

the balance sheet. Thus, the effect of the stock dividend is to transfer $3,100,000 of re-

tained earnings to paid-in capital.

© PHOTODISC COLLECTION/GETTY IMAGES

Jan. 2 Cash Dividends Payable 42,500

Cash 42,500

Retained Earnings 3,100,000*

Stock Dividends Distributable 2,000,000**

Paid-In Capital in Excess of Par—Common Stock 1,100,000

* (100,000 shares $31 market price)

** (100,000 $20 par)

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