5 other forms of dividends dividends can be paid in

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 3–6 Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies? LG5 LG6 13.5 Other Forms of Dividends Dividends can be paid in forms other than cash. Here we discuss two other methods of paying dividends—stock dividends and stock repurchases—as well as a closely related topic, stock splits. Stock Dividends stock dividend The payment, to existing owners, of a dividend in the form of stock. A stock dividend is the payment, to existing owners, of a dividend in the form of stock. Often firms pay stock dividends as a replacement for or a supplement to cash dividends. Although stock dividends do not have a real value, stockholders may perceive them to represent something they did not have before. Accounting Aspects In an accounting sense, the payment of a stock dividend is a shifting of funds between stockholders’ equity accounts rather than a use of funds. When a firm declares a stock dividend, the procedures for announcement and distribution are the same as those described earlier for a cash dividend. The accounting entries associated with the payment of a stock dividend vary depending on its size. A CHAPTER 13 small (ordinary) stock dividend A stock dividend representing less than 20 to 25 percent of the common stock outstanding when the dividend is declared. EXAMPLE Dividend Policy 573 small (ordinary) stock dividend is a stock dividend that represents less than 20 to 25 percent of the common stock outstanding when the dividend is declared. Small stock dividends are most common. The current stockholders’ equity on the balance sheet of Garrison Corporation, a distributor of prefabricated cabinets, is as shown in the following accounts. Preferred stock Common stock (100,000 shares at $4 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity $ 300,000 400,000 600,000 700,000 $2,000,000 Garrison, which has 100,000 shares outstanding, declares a 10% stock dividend when the market price of its stock is $15 per share. Because 10,000 new shares (10% of 100,000) are issued at the prevailing market price of $15 per share, $150,000 ($15 per share 10,000 shares) is shifted from retained earnings to the common stock and paid-in capital accounts. A total of $40,000 ($4 par 10,000 shares) is added to common stock, and the remaining $110,000 [($15 $4) 10,000 shares] is added to the paid-in capital in excess of par. The resulting account balances are as follows: Preferred stock Common stock (110,000 shares at $4 par) Paid-in capital in excess of par Retained earnings Total stockholders’ equity $ 300,000 440,000 710,000 550,000 $2,000,000 The firm’s total stockholders’ equity has not changed; funds have merely been shifted among stockholders’ equity accounts. The Shareholder’s Viewpoint The shareholder receiving a stock dividend typically receives nothing of value. After the dividend is paid, the per-share value of the shareholder’s stock decreases in proportion to the dividend in such a way that the market value of his or her total holdings in t...
View Full Document

Ask a homework question - tutors are online