What is the difference between a stock dividend and a stock split?

A stock dividend transfers retained earnings to contributed capital and increases shares outstanding. A stock split increases shares and reduces par value but does not change any equity account balances.

How is treasury stock accounted for under the cost method?

Recorded at the purchase price as a contra-equity account. When reissued above cost, the excess goes to APIC. When reissued below cost, the difference reduces APIC or retained earnings.

FAR

Stockholders' Equity

Stockholders' equity represents the residual interest in an entity's assets after deducting liabilities, consisting of contributed capital, retained earnings, accumulated OCI, and treasury stock.

Explanation

Contributed capital includes par value of issued stock and additional paid-in capital (APIC) — the excess over par. Retained earnings accumulate net income less dividends declared. Treasury stock (shares repurchased by the company) is a contra-equity account, reducing total stockholders' equity.

Stock dividends transfer an amount from retained earnings to contributed capital based on fair market value (small stock dividends, <20-25%) or par value (large stock dividends, >20-25%). Stock splits increase shares outstanding and reduce par value per share but do not change any equity accounts. Understanding the effects of various transactions on each component of equity is essential for FAR.

Key Points

•Equity = contributed capital + retained earnings + AOCI - treasury stock
•Small stock dividends (<25%): capitalize at fair market value
•Large stock dividends (>25%): capitalize at par value
•Treasury stock reduces total equity (cost method most common)

Exam Tip

Practice calculating the effect of stock dividends, stock splits, and treasury stock transactions on each component of equity.

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