Qdot International originally issued common stock at a price of $20 per share. A year later, they distributed a 10% stock dividend to shareholders. At the time of the stock dividend, the share price had gone up to $24 per share. Under the rules of GAAP for stock dividends, Qdot will record neither a gain nor a loss on the stock dividend, despite the fact that the share price went up.

Question

Quizplus · Accepted Answer

Under GAAP, stock dividends are recorded at the fair market value of the stock at the time of the distribution. Since the fair market value of the stock increased to $24 per share, the company would record the value of the stock dividend at $2.40 per share (10% of $24). This results in an increase in the number of shares outstanding and a corresponding decrease in retained earnings, but no gain or loss is recorded on the stock dividend itself.

Qdot International Originally Issued Common Stock at a Price of $20