So instead of paying a cash dividend, a company can pay a stock dividend instead. Stock dividends give shareholders additional shares of stock, up to this point, we've discussed cash dividends where shareholders receive cash. Now, they will receive extra stock. Stock dividends are just a redistribution of equity. We will be taking, as we are used to, reducing our retained earnings, right? The dividends come out of retained earnings. The same thing happens with the stock dividend, except now, instead of paying it out in cash, we will see it's going to be common stock and additional paid-in capital that get affected. Hence, when we do a stock dividend, we're going to use the current market price of the stock to redistribute retained earnings. This market price will have to be given to you in the question. Essentially, stock dividends are taken from retained earnings, similar to cash dividends. When we show our retained earnings account, we have beginning retained earnings plus our net income minus our dividends, which gets us to our ending retained earnings.
These dividends come out of retained earnings the same, except we're not crediting cash now. We're going to be crediting common stock and APIC instead. Let's see this example of how we deal with stock dividends. Stock dividends are declared as a percentage of the outstanding common stock—for example, a 10% or 20% stock dividend. We are focused on small stock dividends (less than 20%); usually, between 20 to 25% is considered a small stock dividend.
The Apartment Depot declared a stock dividend of 10% on its common stock. Currently, the company has 150,000 shares of common stock outstanding with a par value of 50 cents. The current market price of the stock is $25. As mentioned, they are going to provide a market price in the problem, and we must determine the amount of the stock dividend. The first thing is, they tell us a percentage: 10% of the total outstanding shares. So, 150,000 outstanding shares multiplied by 10%, or 0.10, equals 15,000 shares. The dividend is going to be 15,000 additional shares given out to the stockholders proportionally.
The 15,000 shares, which is the dividend, multiplied by the market value of $25 tells us the total amount of the stock dividend in a dollar amount, which comes out to $375,000. Now, we need to do our journal entry. The hard part is pretty much done. We will reduce our retained earnings by the total amount of the stock dividend, $375,000, and then we will have credits to common stock and APIC. The common stock account only holds the par value, which is going into the common stock account. Everything else is additional paid in capital. So, we had 15,000 shares multiplied by the 50 cents par value, giving us $7,500 as the par value of the stock dividend. The rest of it is additional paid in capital, $375,000 total dividend minus $7,500 par value, giving us $367,500 that goes to APIC.
That's all there is to it when it comes to a stock dividend. Notice, nothing got touched here except for equity accounts: Retained earnings, common stock, and APIC. We went through a couple of steps. First, we figured out the number of shares based on the percentage of the stock dividend and the total shares outstanding. Then using those shares, we found the total amount using the market price. Using the shares of the dividend multiplied by the par value, we got the common stock amount, and APIC was whatever was left over, $367,500. So, every calculation remained balanced here; everything was just a redistribution of equity. Retained earnings went down, but our common stock and APIC went up in the same amount.
Let's pause here, and why don't you guys try a stock dividend question down below?
