CFA Practice Question

CFA Practice Question

Which of the following is (are) true about stock dividends?

I. stock dividends lead to a decrease in the retained earnings account.
II. large stock dividends are valued at their par value.
III. small stock dividends are valued at their fair market value at the time of issuance.
A. I, II and III.
B. I and III.
C. II and III.
Explanation: Stock dividends are given to move retained earnings into capital accounts and hence represent a permanent capitalization of earnings. In that sense, stock dividends do not have any economic significance but are an accounting bookkeeping device. The recapitalization does have legal implications for future distributions since the retained earnings account is the primary source of cash dividends and other accounts are more difficult to dip into for distributions.

If the stock dividend is less than 20-25%, the additional stocks are valued at fair market value on the declaration date and the resultant amount moved from retained earnings account to the "par-value" account and the "additional paid-in capital" account. Larger stock dividends are valued at par.

User Contributed Comments 1

User Comment
stevenzliu why treat the large and small stock dividends differently?
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