Differences between cash dividends and stock dividends

2. Nature of cash dividends

Cash dividends are the most common type of dividend distribution. Shareholders receiving this type of distribution will be given a cash distribution based on the number of shares they own.

Using the XYZ Corporation dividend example, let us assume that there are 40,000 common stock shares outstanding. XYZ Corporation will make the following entry on March 1st, the date of declaration:

Account Titles

Debit

Credit

Retained Earnings (40,000 x $0.30)

12,000

 

      Dividends Payable

 

12,000

On June 1st, the date of payment, the following journal entry is made:

Account Titles

Debit

Credit

Dividends Payable

12,000

 

      Cash

 

12,000

Now let's assume you purchase 500 shares of common stock on March 30th. You are now entitled to receive the declared cash dividend of $0.30 per share. On June 1, you will receive a total of $150 in dividends (500 x $0.30).

3. Nature of stock dividends

Stock dividends are paid in the stock of the issuing company.

Let us change the XYZ Corporation example to reflect a stock dividend. On March 1st the board of directors of the XYZ Corporation elected to provide a 10% stock dividend to all shareholders on record as of April 1st. This dividend is to be paid out on June 1st. This is considered to be a small stock dividend issue as it is less than 20-25% of the existing shares. In accordance with this stock dividend, all shareholders on record as of April 1st will receive 1 additional share for every ten shares they are holding. If you are holding 500 common shares of XYZ Corporation stock, your dividend will be 50 new shares (500 x 10%). All in all, XYZ Corporation will be issuing 4,000 additional shares of common stock (40,000 x 10%).

The addition of new shares will dilute the previous value per share. For example if the previous share value was $20 per share for 40,000 shares, the total market value equaled $800,000 (40,000 x $20). The new share price can be estimated to be $18.18: 40,000 original shares plus 4,000 new shares divided by $800,000 or 44,000 ÷ $800,000. Note that the market value of the XYZ Corporation remains the same.

Assuming that the par value of XYZ Corporation is $0.15, the journal entry to record this transaction is as follows:

Account Titles

Debit

Credit

Retained Earnings (4,000 x $20)

80,000

 

      Common Stock Dividend Distributable (4,000 x $0.15)

 

600

      Paid-in Capital in Excess of Par

 

79,400

On June 1, when the stock dividends are paid, XYZ Corporation will make the following journal entry:

Account Titles

Debit

Credit

Common Stock Dividend Distributable (4,000 x $0.15)

600

 

      Common Stock

 

600

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