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ABSTRACT
When students learn about stock dividends in an intermediate financial accounting class, they may be confused about several factors: why companies issue stock dividends, why investors might like or dislike stock dividends, how to account for stock dividends, and why there is a distinction between and difference in the way we account for small versus large stock dividends. In many basic examples, the amount of retained earnings capitalized for a small stock dividend exceeds the amount of retained earnings capitalized for a large stock dividend for the same company. The students may be especially confused about why this apparent anomaly exists. This paper will give some background on stock dividends in general and then focus on the different ways of accounting for small and large stock dividends. While these two methods of accounting for stock dividends exist under current GAAP, perhaps it is time for the FASB to reconsider if these methods are appropriate. Some suggestions for possible changes to GAAP are given.
INTRODUCTION
A company's dividend policy can signal to shareholders and to the market the success of that particular company. Cash dividends are the most common. In these cases, shareholders receive an amount of cash for each share of stock owned. Property dividends, much less common than cash dividends, require the distribution of noncash assets to the shareholders. Cash and property dividends reduce the retained earnings and assets of the corporation issuing the dividend. In other words, they are seen as a distribution of a portion of the company's earnings to the owners as a return on their investment. A company can also pay liquidating dividends in some cases, especially in the case of a corporate liquidation. These dividends reduce the contributed capital of the corporation and are seen as a return of capital to the shareholders.
Stock dividends are not a distribution of corporate assets, but are instead, a distribution of additional shares of stock to existing stockholders. While requiring a reduction of retained earnings or other paid-in capital, stock dividends do not require assets and can therefore be seen as an alternative way to satisfy shareholders when liquid assets are not available to pay a cash dividend. However, stock dividends have an interesting history which has impacted the...