03. Stock Dividends: Key Concepts for USCPA FAR

By Jay

📘 Stock Dividends (USCPA FAR)

1. ✅ Definition

  • A stock dividend is a distribution of a corporation's own shares to existing shareholders instead of cash.
  • It does not change ownership percentage or total equity.
  • It reclassifies equity between retained earnings and paid-in capital.

2. 🧮 Types of Stock Dividends

TypePercentage of Outstanding SharesMeasurement BasisAccounting Effect
Small Stock Dividend≤ 20–25%Fair Market Value (FMV)Retained earnings ↓, Common stock ↑, APIC ↑
Large Stock Dividend> 25%Par ValueRetained earnings ↓, Common stock ↑ only

3. 📂 Accounting Examples

✅ Small Stock Dividend Example (15%)

  • Outstanding shares: 100,000
  • Par value: $1
  • Market value: $10
  • Dividend rate: 15% (15,000 shares)

Journal Entry:

Dr. Retained Earnings      $150,000   (15,000 × $10)
    Cr. Common Stock           $15,000   (15,000 × $1)
    Cr. Additional PIC         $135,000

✅ Large Stock Dividend Example (30%)

  • Uses only par value, regardless of market price

Journal Entry:

Dr. Retained Earnings $30,000 
    Cr. Common Stock  $30,000

4. 💡 USCPA Exam Tips

  • Memorize the 25% threshold: ≤25% = Small; >25% = Large
  • Small → FMV used; Large → Par Value used
  • Stock dividends do not affect total equity
  • Recalculate EPS and prior-period data retroactively if needed
  • No APIC for large stock dividends
  • Understand impact on retained earnings and journal entry structure

📝 Practice Question 1

Question:

Delta Corp. has 100,000 shares of $1 par value common stock outstanding. The company declares a 15% stock dividend when the market value is $12. What amount should be deducted from retained earnings?

  • A. $15,000
  • B. $180,000
  • C. $12,000
  • D. $150,000

✅ Correct Answer: B
Explanation:

  • Small dividend → Use FMV
  • 100,000 × 15% = 15,000 shares
  • 15,000 × 12=12 = 180,000 deducted from retained earnings

📝 Practice Question 2

Question:

Alpha Inc. has 1,000,000 shares of $2 par value common stock. It declares a 30% stock dividend when the market price is $10. What amount is credited to Additional Paid-in Capital?

  • A. $600,000
  • B. $900,000
  • C. $0
  • D. $300,000

✅ Correct Answer: C
Explanation:

  • Large dividend → Use par value only
  • No APIC is recorded
  • Correct answer: $0