‫جامعة كفر الشيخ‬ ‫‪Kafrelsheikh University‬‬

‫كلية التجارة‬ ‫‪Faculty Of Commerce‬‬

‫عبدالحميد محمد عبدالحميد العطار‬ ‫اسم الطالب‬

‫‪382‬‬ ‫رقم الجلوس‬

‫‪0101999453‬‬ ‫رقم التيلفون‬

‫التانيه‬ ‫الفرقه‬

‫انتظام‬ ‫انتظام ‪ /‬انتساب‬

‫محاسبه شركات االموال‬ ‫املاده‬

‫ا‪.‬د‪ /‬احمد عبدالسالم ابو موسى‬ ‫استاذ املاده‬

‫‪Explain how to account for cash dividends, Stock dividends,‬‬ ‫عنوان البحث‬

‫‪and Stock splits‬‬

‫‪1‬‬
 Introduction
Companies make for cash dividends at the declaration date and at the payment date. At

the declaration date, the entry is debit Cash Dividends and credit Dividends Payable. At

the payment date, the entry is debit Dividends Payable and credit Cash.

At the declaration date, the entry for a small stock dividend is debit Stock Dividends,

credit Paid-in Capital in Excess of Par (or Stated Value)— Common Stock, and credit

Common Stock Dividends Distributable. At the payment date, the entry for a small stock

dividend is debit Common Stock Dividends Distributable and credit Common Stock. A

stock split reduces the par or stated value per share and increases the number of shares

but does not affect balances in stockholders’ equity accounts.

Elements of the research

1. Different types of dividends (Cash, propriety, stock, and scrip)

2. The three requirement to pay cash dividends

3. Accounting for the cash dividends

4. The main reasons for stock dividends

5. Accounting for the stock dividends (small stock dividends and large stock dividends)

6. Stock splits

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7. Main differences between stock dividends and stock splits and its effect on stated

value per share, number of shares outstanding, and market value per share

Subject
Different Types Of Dividends (Cash, Propriety, Stock, And Scrip)

Cash dividends. This form of dividend payment is the most common among the

different types of distributions. “Cash” may sometimes be paid in the form of actual

cash, but it’s more commonly paid by check or electronic funds transfer. You’ll receive

a dividend for each of the stock shares that you own in a company, and your payments

may be made quarterly, annually or at other periodic intervals, depending on the terms

of your investment and the corporation’s board policies.

Stock dividends. If a company pays dividends in stock, you won’t be taxed on the

distributions until you sell the stock, which is a short-term advantage for you. An

advantage to the issuing company is their not having to pay cash, which helps if the

company is having financial difficulty with its cash flow. Another reason a company may

pay dividends in stock is when the company wants to use its available cash for business

purposes. Generally, a company issues stock as dividends based on the numbers of

stock shares you already own.

Property/Product dividends.  Some types of dividend distributions are

nonmonetary dividends. For example, you may receive a property or product dividend.

Property includes products that the company makes (or even product samples),

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services that the company offers or stock from a subsidiary it owns. Product samples

dividends are not commonly given, but this is an allowable dividend distribution.

Typically, a company does not have to give prior notice to its shareholders when it

issues property dividends, and the dividends are taxed based on their value. A

company may choose to pay its shareholders in property dividends if they’re

experiencing financial difficulty and its cash flow is compromised.

Scrip Dividends. A company that sees it will be unable to pay dividends in the future

may issue scrip dividends. Essentially, this is a promissory note, which creates a note

payable, with a promise to pay their shareholders. The scrip dividend may or may not

carry interest, and the promise to pay may include cash payments or payments in

additional shares of stock at a future date. Scrip dividends allow companies to

conserve their cash, and they offer investors the tax benefit of not having to pay

income tax until they sell their shares.

The Three Requirement To Pay Cash Dividends

A cash dividend is a pro rata distribution of cash to stockholders. Cash dividends are

not paid on treasury shares. For a corporation to pay a cash dividend, it must have the

following.

Retained earnings. The legality of a cash dividend depends on the laws of the

state in which the company is incorporated. Payment of cash dividends from retained

earnings is legal in all states. In general, cash dividend distributions from only the

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balance in common stock (legal capital) are illegal. A dividend declared out of paid-in

capital is termed a liquidating dividend. Such a dividend reduces or “liquidates” the

amount originally paid in by stockholders. Statutes vary considerably with respect to

cash dividends based on paid-in capital in excess of par or stated value. Many states

permit such dividends.

Adequate cash. The legality of a dividend and the ability to pay a dividend are two
different things. For example, Nike, with retained earnings of over $5.6 billion, could

legally declare a dividend of at least $5.6 billion. But Nike’s cash balance is only $3.3

billion. Before declaring a cash dividend, a company’s board of directors must carefully

consider both current and future demands on the company’s cash resources. In some

cases, current liabilities may make a cash dividend inappropriate. In other cases, a

major plant expansion program may warrant only a relatively small dividend.

Declared dividends. A company does not pay dividends unless its board of

directors decides to do so, at which point the board “declares” the dividend. The board

of directors has full authority to determine the amount of income to distribute in the

form of a dividend and the amount to retain in the business. Dividends do not accrue

like interest on a note payable, and they are not a liability until declared.

The amount and timing of a dividend are important issues for management to consider.

The payment of a large cash dividend could lead to liquidity problems for the company.

On the other hand, a small dividend or a missed dividend may cause unhappiness

among stockholders. Many stockholders expect to receive a reasonable cash payment

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from the company on a periodic basis. Many companies declare and pay cash dividends

quarterly. On the other hand, a number of high-growth companies pay no dividends,

preferring to conserve cash to finance future capital expenditures.

Accounting for the cash dividends

There are Three dates are important in connection with dividends: (1) the declaration
date, (2) the record date, and (3) the payment date. Normally, there are two to four
weeks between each date. Companies make accounting entries on the declaration date
and the payment date. On the declaration date, the board of directors formally
declares (authorizes) the cash dividend and announces it to stockholders. The
declaration of a cash dividend commits the corporation to a legal obligation. The
company must make an entry to recognize the increase in Cash Dividends and the
increase in the liability Dividends Payable

Example
On Dec. 1, the directors of Media General declare a 50 cents per share cash dividend on

100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to

shareholders of record on Dec. 22.

Dec. 1 (Declaration Date)

Cash Dividends 50,000

Dividends Payable 50,000

Dec. 22 (Date of Record) No entry

Jan. 20 (Payment Date)

Dividends Payable 50,000

Cash 50,000

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Media General debits the account Cash Dividends. Cash dividends decrease retained

earnings. We use the specific title Cash Dividends to differentiate it from other types of

dividends, such as stock dividends. Dividends Payable is a current liability. It will

normally be paid within the next several months. For homework problems, you should

use the Cash Dividends account for recording dividend declarations.

At the record date, the company determines ownership of the outstanding shares for

dividend purposes. The stockholders’ records maintained by the corporation supply

this information. In the interval between the declaration date and the record date, the

corporation updates its stock ownership records. For Media General, the record date is

December 22. No entry is required on this date because the corporation’s liability

recognized on the declaration date is unchanged

Note that payment of the dividend reduces both current assets and current liabilities. It

has no effect on stockholders’ equity. The cumulative effect of the declaration and

payment of a cash dividend is to decrease both stockholders’ equity and total assets.

The Main Reasons For Stock Dividends

A stock dividend is a pro rata (proportional to ownership) distribution of the

corporation’s own stock to stockholders. Whereas a company pays cash in a cash

dividend, a company issues shares of stock in a stock dividend. A stock dividend results

in a decrease in retained earnings and an increase in paid-in capital. Unlike a cash

dividend, a stock dividend does not decrease total stockholders’ equity or total assets.

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Corporations issue stock dividends generally for one or more of the following reasons.

1. To satisfy stockholders’ dividend expectations without spending cash.

2. To increase the marketability of the corporation’s stock. When the number of shares

outstanding increases, the market price per share decreases. Decreasing the market

price of the stock makes it easier for smaller investors to purchase the shares.

3. To emphasize that a company has permanently reinvested in the business a portion

of stockholders’ equity, which therefore is unavailable for cash dividends.

Accounting for the stock dividends (small stock dividends and

large stock dividends)

When the dividend is declared, the board of directors determines the size of the stock

dividend and the value assigned to each dividend. Generally, if the company issues a

small stock dividend (less than 20–25% of the corporation’s issued stock), the value

assigned to the dividend is the fair value (market price) per share. This treatment is

based on the assumption that a small stock dividend will have little effect on the

market price of the shares previously outstanding. Thus, many stockholders consider

small stock dividends to be distributions of earnings equal to the market price of the

shares distributed. If a company issues a large stock dividend (greater than 20–25%),

the price assigned to the dividend is the par or stated value. Small stock dividends

predominate in practice. Thus, we will illustrate only entries for small stock dividends

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Medland Corporation declares a 10% stock dividend on its 50,000 shares of $10
par value common stock. The current fair market value of its stock is $15 per
share. Record the entry on the declaration date:

Stock Dividends (50,000 x 10% x $15) 75,000

Common Stock Dividends Distributable 50,000

Paid-in Capital in Excess of Par—Common 25,000

Common Stock Dividends Distributable 50,000

Common Stock Dividends Distributable 50,000

Effects Of Stock Dividends

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Stock splits
A stock split, like a stock dividend, involves issuance of additional shares to
stockholders according to their percentage ownership. However, a stock split
results in a reduction in the par or stated value per share. The purpose of a stock
split is to increase the marketability of the stock by lowering its market price per
share. This, in turn, makes it easier for the corporation to issue additional stock.
The effect of a split on market price is generally inversely proportional to the size
of the split. For example, after a 2-for-1 stock split, the market price of Nike’s
stock fell from $111 to approximately $55. The lower market price stimulated
market activity. Within one year, the stock was trading above $100 again

In a stock split, the company increases the number of shares in the same
proportion that par or stated value per share decreases. For example, in a 2-for-1
split, the company exchanges one share of $10 par value stock for two shares of
$5 par value stock. A stock split does not have any effect on total paid-in capital,
retained earnings, or total stockholders’ equity. However, the number of shares
outstanding increases, and par value per share decreases

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Main differences between stock dividends and stock splits and
its effect on stated value per share, number of shares
outstanding, and market value per share.
Cash Dividend means dividend which is paid to shareholders in Cash/ Bank. When a

company doesn’t have cash for payment of dividends, it gives dividends in the form of

equity or we can say that additional shares of the Company are allotted to the

shareholder. This term is called Stock Dividend. Stock Split is one of the forms of

Corporate Action. Stock Split and Stock Dividend are different, and cannot be used

interchangeably. Let’s understand the Stock Split. As the name itself tells the meaning,

Stock Split means splitting of Stock or Equity Shares. Stock splits are splitting of already

issued shares to increase the no. of shares of the Company.

Stock Dividend:

Distribution of Profit to Equity shareholders is known as Dividend. The dividend is of two

types namely:

1. Cash Dividend

2. Stock Dividend

In simple words, the dividend which is paid in the form of equity or shares instead of

Cash is known as Stock Dividend. Now the question comes why the Company pays a

dividend in Equity Form. There are some reasons for distributing Stock Dividend by the

company. Below are the main reasons for stock dividend:

1. The company doesn’t have sufficient cash to pay the dividend.

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 2. To increase the Issued shares of the Company.

3. To give the Tax benefit to the shareholder, which means that when a dividend is

paid in Cash it is Taxable as Income, but when paid in the equity shares, it will be

taxable only when the shareholder sells the shares. Hence, Investors will get tax

benefits.

Advantages of Stock Dividend:

1. Increase the Liquidity of Cash,

2. Increases the Liquidity of Shares in the market
3. Increases the investor interest in the company by giving Tax Benefits.

Stock Split:

To understand it better let’s take an example, Mr. A is holding 10000 Shares of

Company XYZ Limited having a face value of Rs. 100 and market value Rs. 150. Now,

company XYZ Limited declares the Stock Split in the ratio of 2 for 1 which means

that for every 1 share, a shareholder will get 1 more share. In this example, Mr. A is

holding 10000 Shares, after the stock split his shareholding will increase to 20000

shares. Be noted that the price of the share due to stock split will go down and no.

of shares will increase.

The stock split is performed by the company for increasing or decreasing the no. of
shares in the market and the value of shares. The stock split which increases the no. of
shares is called as forwarding Stock Split and stock split which decreases the no. of

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shares is called Reverse Stock Split. Why the Company performs the Stock Split? Reasons
are as mentioned below:

1. When the Board of Directors of the company thinks that the market price of the

share is overpriced. Hence, to reduce the Price of share.

2. To increase the liquidity of shares.

3. Due to the reduction of Price, it allows more investors to buy the shares.

4. A stock dividend means dividend which is paid in the form of additional shares

whereas stock split is a division of issues shares in the ratio as decided by Company.

5. In the Stock dividend, additional shares are given to shareholders whereas in stock

split already issued shares are split in an agreed ratio. No additional shares are

allotted

6. The main reason for the stock dividend is due to the shortage of cash flow in the

company whereas the main purpose for the stock split is for reducing the market

price of the shares

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 Conclusion
A dividend is a share of profits and retained earnings that a company pays out to its

shareholders. When a company generates a profit and accumulates retained earnings,

those earnings can be either reinvested in the business or paid out to shareholders as a

dividend. The annual dividend per share divided by the share price is the dividend yield.

Cash Dividend means dividend which is paid to shareholders in Cash/ Bank. When a

company doesn’t have cash for payment of dividends, it gives dividends in the form of

equity or we can say that additional shares of the Company are allotted to the

shareholder. This term is called Stock Dividend. Stock Split is one of the forms of

Corporate Action. Stock Split and Stock Dividend are different, and cannot be used

interchangeably. Let’s understand the Stock Split. As the name itself tells the meaning,

Stock Split means splitting of Stock or Equity Shares. Stock splits are splitting of already

issued shares to increase the no. of shares of the Company.

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 References

 Accounting principles global edition book by kieso

 Slides of accounting principles book

 Company accounting and selected accounting problems custom edition tanta

university

14
 content

1 Introduction
2 Types Of Dividends
3 Requirement To Pay Cash Dividends
4 Cash Dividends
6 Reasons For Stock Dividends
7 Small Stock Dividends And Large Stock Dividends
9 Stock Splits
10 Differences Between Stock Dividends And Stock Splits
13 Conclusion
14 References

15