Q16RQ - Horngren'S Financial And Managerial Accounting

Question

What is the effect on the accounting equation when a stock dividend is declared? 

What is the effect on the accounting equation when a stock dividend is distributed?

Step-by-Step Solution

Answer

 

	Retained earnings	Common stock	Paid-in capital in excess of par
Stock dividend declared	No effect	No effect	No effect
Stock dividend distributed
Small Stock dividend	Decreases	Increases	Increases
Large stock dividend	Decreases	Increases	No effect

 

Step 1: Introduction to topic

A stock dividend, a method utilized by corporate to distribute wealth to stockholders, is a dividend payment made in the form of shares instead than cash.

Step 2: Effect of stock dividend declared and distribution on accounting equation

When a stock dividend is declared it does not create a liability as there is no change to the accounting equation. The creation of stockholders' equity does, however, changes. After dividend distribution, the accounting equation remains the same, but the stockholder's equity will just be arranged again. 

For a small stock dividend:

Retained earnings decrease and Common stock with Paid-in capital in excess of par increase. 

For a large stock dividend:

Retained earnings decrease and Common stock increases.