Stock Dividend Journal Entry

Sometimes, the company may decide to issue the stock dividend to its shareholders instead of the cash dividend. This may be due to the company does not have sufficient cash or it does not want to spend cash, etc. In either case, the company needs the proper journal entry for the stock dividend both at the declaration date and distribution date.

Similar to the cash dividend, the stock dividend will reduce the retained earnings at the year-end. However, as the stock usually has two values attached, par value and market value, it considered less straightforward than the cash dividend transaction.

In this case, if the company issues stock dividends less than 20% to 25% of its total common stocks, the market price is used to assign the value to the dividend issued. This issuance of the stock dividend is called a small stock dividend.

On the other hand, if the company issues stock dividends more than 20% to 25% of its total common stocks, the par value is used to assign the value to the dividend. This issuance of the stock dividend is called a large stock dividend.

Stock dividend journal entry

Small stock dividend journal entry

Declaration date

The company can make the small stock dividend journal entry on the declaration date by debiting the stock dividends account and crediting the common stock dividend distributable account and the paid-in capital in excess of par-common stock for the difference between the stock price and the par value.

Stock dividends account is a temporary contra account to retained earnings. This account will be closed to the retained earnings at the year-end closing entry.

Common stock dividend distributable is an equity account, not a liability account. Likewise, this account is presented under the common stock in the equity section of the balance sheet if the company closes the account before the distribution date of the stock dividend.

Similar to the cash dividend, the company may not have the stock dividends account. This is usually due to it doesn’t want to bother keeping the general ledger of the current year dividends.

In this case, the company will just directly debit the retained earnings account in the entry of the stock dividend declared.

Distribution date

On the distribution date of the stock dividend, the company can make the journal entry by debiting the common stock dividend distributable account and crediting the common stock account.

Small stock dividend example

For example, on December 18, 2020, the company ABC declares a 10% stock dividend on its 500,000 shares of common stock. Its common stock has a par value of $1 per share and a market price of $5 per share. The stock dividend is to distribute to the shareholders on January 12, 2021.

What is the journal entry for the stock dividend?

Solution:

On December 18, 2020

When the company ABC declares the stock dividend on December 18, 2020, it can make the journal entry as below:

In this journal entry, as the company issues the small stock dividend (less than 20%-25%), the market price of $5 per share is used to assign the value to the dividend. Hence, the value of stock dividend is $250,000 (500,000 x 10% x $5). Likewise, the common stock dividend distributable is $50,000 (500,000 x 10% x $1) as the common stock has a par value of $1 per share.

On January 12, 2021

When the company ABC distributes the stock dividend on January 12, 2021, it can make the journal entry as below:

Large stock dividend journal entry

Declaration date

The company can make the large stock dividend journal entry on the declaration date by debiting the stock dividends account and crediting the common stock dividend distributable account.

In this journal entry, there is no paid-in capital in excess of par-common stock as in the journal entry of small stock dividend. This is due to when the company issues the large stock dividend, the value assigned to the dividend is the par value of the common stock, not the market price.

Distribution date

The journal entry of the distribution of the large stock dividend is the same as those of the small stock dividend.

Large stock dividend example

For example, if the company ABC in the example above declares a 30% stock dividends instead of 10%, the value assigned to the dividend would be the par value of $1 per share as it is considered the large stock dividend (greater than 20%-25%).

In this case, the company would make the journal entry for the large stock dividend of $150,000 ( 500,000 x 30% x $1) by using the par value, instead of the market price, at the declaration date as below: