=36. Declaring a Stock Dividend.= Not all dividends are paid or payable in cash. Sometimes the directors declare a dividend payable in stock and this is known as a stock dividend. There may be treasury stock in possession of the treasurer, and if the books show a surplus, which would make it proper to declare a cash dividend, a dividend may be declared payable in treasury stock. When such a dividend is declared the entry is-- Profit and Loss Stock dividend A dividend of----% declared by the board of directors --------1909 payable--------1909, payment to be made in treasury stock Stock dividend Treasury stock To pay stock dividend declared--------1909. The shares are then transferred on the stock books debiting treasury stock and crediting stockholders. It is not absolutely necessary that a company possess treasury stock to declare a stock dividend. When current profits are large or a surplus, larger than the requirements of the business demand, has been accumulated, a stock dividend may be declared by issuing additional shares, provided the original stock has not all been subscribed for. If a large surplus has been accumulated and a part of the stock is unsubscribed, a stock dividend would require the following entries: Surplus Stock dividend A stock dividend of----% declared by the directors--------1909 payable in the unissued stock of this company. -------- Subscriptions Capital stock Additional stock subscriptions received from the following. -------- Stock dividends Subscriptions Stock dividend due stockholders used to off-set subscriptions. The stock dividend is a device frequently used to conceal actual profits, or to cover up the fact that dividends are being declared in excess of a fixed rate. This is especially true of such public service corporations as lighting companies or street railways. In many cases a company will go through the necessary formalities to increase its capital stock for the purpose of absorbing surplus by means of a stock dividend. =37. Treatment of a Loss.= If, during any year, the business has sustained a loss, it will, of course, appear as a balance on the debit side of profit and loss account. This will then be transferred to the debit of undivided profits or surplus, if any, remaining from previous years. For illustration, suppose the books show a surplus of $5,000.00, undivided profits $500.00, loss for the current year $2,500.00, the entry will be:-- Undivided profits $500.00 Surplus 2,000.00 Profit and loss $2,500.00 Loss for the year. If there is no surplus remaining from former years, the business is insolvent, in which case the capital is said to be impaired. This can be taken care of in either of two ways. First--by the stockholders subscribing to a fund to cover the deficiency. Second--by a reduction of the capital stock. EXERCISES