LO10–6 Explain the effect of stock dividends and stock splits.

What is a stock dividend?

A distribution of additional shares to shareholders instead of cash.

What is a stock split?

A corporate action that increases the number of shares and reduces the share price, without changing total value.

Example: 2‑for‑1 split

• 1 share → 2 shares

• 100 shares → 200 shares

• 1,000 shares → 2,000 shares

But the company is still the same size.

What changes?

• Number of shares ↑

• Par value per share ↓

What DOESN’T change?

• Total equity

• Total assets

• Total liabilities

• Total par value

• Total value of your investment

NO JOURNAL ENTRY

Stock splits & Stock dividends

• Stock splits and stock dividends do NOT change the size of the company.

• They only change how many pieces the company is cut into.

Imagine a pizza.

• 8 slices

• You cut each slice in half → now 16 slices

• Did the pizza get bigger? No.

• You just changed the number of pieces.

This is EXACTLY what stock splits and stock dividends do.

What happens in a 10% stock dividend?

You receive 10 extra shares for every 100 you own.

What happens in a 100% stock dividend?

You receive 100 extra shares for every 100 you own (same as a 2‑for‑1 split).

Does a stock split change the total value of your investment?

No. You have more shares, but each share is worth less. Total value stays the same.

Example: Before a 2‑for‑1 split you own 100 shares at $40. After the split?

You own 200 shares at $20. Total value = $4,000 (unchanged).

Why do companies declare stock splits?

To lower the share price and make the stock more affordable to more investors.

Does a stock split change total assets, liabilities, or equity?

No change to any of them.

What happens to par value in a stock split?

Par value per share decreases (e.g., cut in half in a 2‑for‑1 split).

Do we record a journal entry for a stock split?

No journal entry is recorded.

Why do companies avoid changing par value?

It is expensive and complicated to update all legal and electronic records.

Every document, every system, every record has to be updated.

So instead of doing a “real” split, companies often do this accounting trick:

Treat the split like a large stock dividend.

This lets them double the shares without touching par value.

Example of a 2‑for‑1 stock split

1,000 shares → 2,000 shares; par value $0.01 → $0.005; total par value stays $10.

What is a large stock dividend?

A stock dividend of 25% or more (e.g., 100% stock dividend).

How are large stock dividends recorded?

At par value of the new shares.

Journal entry for a large stock dividend

Example: 100% stock dividend on 1,000 shares at $0.01 par

Debit Stock Dividends 10

Credit Common Stock 10

Issue 1,000 new shares →

increase Common Stock by $10 →

decrease Retained Earnings by $10.

Effect of a large stock dividend on equity

• Common Stock ↑

• Retained Earnings ↓

• Total equity stays the same

Why do companies treat stock splits like large stock dividends?

To avoid changing par value while still doubling the number of shares.

How are small stock dividend recorded?

At market value of the new shares.

Why are small stock dividends recorded at market value?

Because they are treated like a real distribution of value, not just slicing shares.

Example: 10% small stock dividend on 1,000 shares at $30 market value

Par value = $0.01

• New shares = 100

• Stock Dividends = $3,000

• Common Stock = $1

• APIC = $2,999

Debit Stock Dividends 3000

Credit Common Stock 1

Credit Additional Paid-In Capital 2999

Effect of a small stock dividend on equity

• Retained Earnings ↓ (full market value)

• Common Stock ↑ (par value)

• APIC ↑ (difference)

• Total equity, assets, and liabilities stays the same

Do stock dividends change total equity?

No. They only move amounts within equity.

Stock Split vs. Large Stock Dividend — par value

• Stock split: par value decreases

• Large stock dividend: par value unchanged

Stock Split vs. Stock Dividend — total equity

Both result in no change to total stockholders’ equity.

What happens to share price after a stock split or stock dividend?

It decreases proportionally because ownership is divided into more shares.

Stock Split

• NO par value used.

• NO market value used.

• NO journal entry.

Because a stock split is literally just slicing shares into more pieces.

Example:
1,000 shares → 2,000 shares
Par value $0.01 → $0.005
Total par value stays $10

1000 × 0.01 = 10

2000 × 0.05 = 10

You don’t record anything.
You don’t touch equity.
You don’t touch par value in the journal.

You do NOTHING.

Large stock Dividend (25% or more)

• USE PAR VALUE ONLY.

• DO NOT use market value.

Because a large stock dividend is treated like a stock split in disguise.

Example: 100% stock dividend on 1,000 shares at $0.01 par

• 1,000 new shares → 1,000 × $0.01 = $10

Debit stock dividends 10

Credit common stock 10

✔ Common Stock ↑

✔ Retained Earnings ↓

❌ Total equity unchanged

❌ Market value NOT used

Small stock dividend (less than 25%)

Small stock dividends use BOTH market value AND par value — but for DIFFERENT accounts.

Retained earnings decrease by MARKET VALUE

• Because the company is giving shareholders real value

Common stock increases by PAR VALUE

• Because all stock issuances ALWAYS use par value for the common stock account

APIC gets the difference

Example of small stock (less than 25%)

• 1,000 shares

• 10% dividend → 100 new shares

• Market value = $30

• Par value = $0.01

Total value of dividend: 100 × 30 = $3000

• This reduces retained earnings

Common stock (par value): 100 × 0.01 = $1

• This increases common stock

APIC (the rest): 3000 - 1 = $2,999

• This increases APIC

Debit stock dividends $3,000

Credit Common Stock $1

Credit Additional PIC $2,999

• Market value → Retained Earnings

• Par value → Common Stock

• Difference → APIC