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Question 23Q

Intermediate Accounting (Kieso)
Found in: Page 810

Short Answer

Describe the accounting entry for a stock dividend, if any. Describe the accounting entry for a stock split, if any.

The journal entry to record the declaration of the dividend includes a debit to retained earnings (a stockholders' equity account) and a credit to cash dividends payable.

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Step by Step Solution

Meaning of Stock Dividend

A stock dividend is an increase in the number of shares issued by a firm, with the new shares being distributed to current owners.

Existing shareholders are paid a pro-rata share of these new shares. These are usually paid infractions and per share.

Meaning of Stock Split

When a corporation splits its stock, it raises the number of outstanding shares to increase its liquidity.

Although the number of outstanding shares grows by a certain multiple, the share price falls in proportion to that multiple because the firm is not more valuable due to the split.

Describing Accounting Entry for Stock Dividend and Stock Split

When a stock dividend is paid, an amount equal to the fair value of each share (if the dividend is less than 20-25 percent) or the par value of each share is transferred from retained earnings to paid-in capital (if the dividend is greater than 20-25 percent).

A stock split does not necessitate formal journal entries, but a remark in the ledger accounts to show that the par value of the shares has changed would be useful.

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