Dividend

Small stock dividend or Lower percentage stock dividend

Small or lower percentage stock dividend

If the percentage of a stock dividend is less than or equal to 20-25% such a dividend called a lower percentage or small stock dividend. The effects of this dividend as follows:

  1. Increases the numbers of outstanding shares by the percentage of a stock dividend
  2. Increases the share capital by the par value
  3. Similarly, increases the additional paid in capital, formula, Increased amount of additional paid in capital = New numbers of shares × [Market price per share (MPS) – Par value]
  4. Decreases the amount of retained earnings, formula, Decreased amount of retained earnings = New numbers of shares × Market price per share at the time of declaration
  5. No effects in total shareholders equity
  6. Decrease in market price per share (MPS), formula, New MPS = Old MPS/ 1 + % of stock dividend

Let’s, clarify it through the example,

The stockholder’s equity section of A Company Limited on January 1 is as follows,

DetailsAmount (Rs.)
Common stock
(5,000 shares of Rs. 100 each)
Additional paid-in capital
Retained earnings

5,00,000
2,50,000
3,30,000
Total stockholders equityRs. 10,80,000

During the year the company declared a 10% stock dividend to the common stockholders which are to be distributed on the March. The market price per share at the time of the declaration is Rs. 150 and at the time of distribution, it is Rs. 130 per share.

Required:

Show the effects of the stock dividend and prepare the new stockholder’s equity section of the company. Also, calculate the new market price per share and prepare journal entries while declaring & distributing the dividend.

Solution:

Numbers of outstanding shares before stock dividend = 5,000 share

Par value = Rs. 100 per share

Stock dividend percentage = 10%

Additional numbers of shares to be issued = 10% of 5000 shares

= 500 shares

Now,

Total numbers of outstanding shares = 5000 + 500 = 5500 shares

Increased amount of additional paid in capital = New numbers of shares × Market price per share – Par value = 500 × 150 – 100 = Rs. 25,000

Decreased amount in retained earnings = New numbers of share × Market priceer share = 500 × 150 = Rs. 75,000

Now, New stockholders equity section

DetailsAmount (Rs.)
Common stock
(5500 shares @ Rs. 100 each)
Additional paid-in capital
(2,50,000 + 25,000)
Retained earnings (3,30,000 – 75,000)

5,50,000

2,75,000
2,55,000
Total stockholders equityRs. 10,80,000

Journal entries

When dividends declared

March,

Retained earnings a/c Dr. Rs. 75,000

Stock dividends payable a/c      Rs. 75,000

(To record the declaration of 10% stock dividend )


When dividends paid

March,

Stock dividends payable a/c Dr. Rs. 75,000

Common stock a/c                                Rs. 50,000

Additional paid-in capital a/c.           Rs. 25,000

(To record the distribution of stock dividends)


New, Market price per share (MPS)

New MPS = Old MPS/ 1 + % of stock dividend

.       = 150/ 1 + 0.1

.       = Rs. 136.36

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