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Question CA15-5

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Intermediate Accounting (Kieso)
Found in: Page 823

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Short Answer

(Stock Dividends) Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.

Instructions

  1. The first topic the vice president wishes to discuss is the nature of the stock dividend to the recipient. Discuss the case against considering the stock dividend as income to the recipient.
  2. The other topic for discussion is the propriety of issuing the stock dividend to all “stockholders of record” or to “stockholders of record exclusive of shares held in the name of the corporation as treasury stock.” Discuss the case against issuing stock dividends on treasury shares.

Kulikowski Inc. should follow the theoretical concepts and implications that underlie the issuance of a stock dividend.

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Step by Step Solution

Meaning of Stock dividend

Stock dividend, a strategy used by companies to deliver money to shareholders, maybe a profit payment made in the form of an offer rather than cash. Stock profits are issued in exchange of cash profits when the company is short on liquid cash in hand. The board of directors chooses when to pronounce (stock) profits and in what size the profits will be paid out.

Explaining the case against considering the stock dividend as income to the recipient.

The case against treating traditional share profit as wage has been upheld by the lion’s share of bookkeeping experts. It is based on "unit" and "proprietary" interpretations.

In the event that the corporation is considered a substance divided by the shareholders, the organization's pay is corporate pay, and the shareholders' salary is not, despite the fact that the value of shareholders within the organization increases as the organization’s pay increases.

This position is stable with the interpretation that the benefit is not paid to the beneficiary unless it is realized as a result of division, diffusion, or separation of corporate resources. Shared profit redistributes the value of each shareholder over a large number of offers. Granting share benefits under this translation has the effect of reducing the recipient's proportionate share of the value of the corporation.

A similar situation is based on the "proprietary" interpretation. The salary of the organization is considered to be the salary to the proprietors, and, as a result, the share profit speaks as it was renaming the value as there is no increase in proprietorship.

Discussing the case against issuing stock dividends on treasury shares

The case against the issuance of share dividends on Treasury offers rests on the contention that the "lack of equity" by way of installment of cash reduces the number of extraordinary offers in the offers reclaimed by the organization. Agreeing to this point of view, the enterprise cannot acquire a special interest in itself when it reclaims its proprietary offerings.

Held profits are considered exclusive because they were among the owners of the extraordinary offers, and the shares are entitled to profit as they were extraordinary offers.

In states that allow Treasury offers to carry share profit or interest within the vehicle that goes with the share portion, a Treasury offer is effected by the systematic use (such as issuing a Treasury offer with representative share options). Unless there are special employments for Treasury proposals, no valuable reason is given to the Treasury by issuing additional offers.

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