What is the accounting treatment for large stock dividends?

Large stock dividends are treated differently compared to small stock dividends due to their impact on the capital structure of the company. When a company issues a large stock dividend, typically defined as a dividend that is 20% or more of the existing shares outstanding, this transaction results in a reallocation of equity rather than a cash outflow.

The correct accounting treatment involves transferring the par value of the additional shares that are issued as a dividend directly to the capital stock account. This means that the company will take the total par value of the newly issued shares and add it to the capital stock, which reflects an increase in the number of shares outstanding.

Retained earnings must decrease by the same amount to reflect the distribution of the dividend. This transfer serves to maintain the overall equity balance, as no cash is exchanged—only shares are distributed to existing shareholders. This accounting treatment ensures compliance with accounting principles, as it accurately represents the financial position and capital structure of the company after the large stock dividend is issued.

The other options would not accurately reflect the accounting requirements or the implications of issuing large stock dividends, which is why they do not represent the proper treatment in this context.