How Do Dividends Affect Additional Paid-In Capital?
Dividends are a common way for companies to pay back some of their capital to shareholders. Dividends paid in stock shares are debited from a subaccount called the additional paid-in capital. These payouts occur regularly each year, whether quarterly, monthly, or semi-annually. Dividends can be paid out as cash or in the form of stock.
Key Takeaways
- Additional paid-in capital (APIC) is an accounting term for the amount an investor pays above the stock’s par value.
- Since cash dividends are deducted from a company’s retained earnings, there is no effect on the additional paid-in capital.
- When a company issues a stock dividend, it rewards shareholders with additional shares of stock for each share they already own.
What Is Additional Paid-in Capital (APIC)?
Additional paid-in capital is an accounting term for the amount an investor pays above the stock’s par value. The par value, which can be for common or preferred stock, is the value of the stock as stated in the corporate charter. This value is normally set very low, as shares cannot be sold below the par value.
Any money the company collects above the par value is considered additional paid-in capital and is recorded as such on the balance sheet. When a company agrees to sell shares in an initial public offering (IPO) or a new stock issue, it normally sets the price at the par value.
The company may designate some shares at a higher price. Whatever the company collects from the sale over and above its par value is put into the additional paid-in capital account on the balance sheet. This account is similar to a capital dividend account, which is not reported on financial statements.
Whether a dividend distribution affects additional paid-in capital depends solely on what type of dividend is issued—cash or stock.
Impact of a Cash Dividend
A cash dividend is simply a set amount the company pays its shareholders per owned share. Companies pay investors dividends to reward them and share the profits. The board of directors normally determines whether the dividend stays the same or changes.
A shareholder who owns 50 shares and receives a 50 cent dividend per share earns $25. Cash dividend funds are deducted from retained earnings and do not affect additional paid-in capital.
State laws may limit the timing and amount of dividends a company can declare. Dividends may be prohibited if doing so leads to a company’s insolvency.
Impact of a Stock Dividend
When a company issues a stock dividend, it rewards shareholders with additional shares of stock for each share they already own. Most companies that pay out stock dividends do so if they don’t have enough cash reserves to reward their investors.
The amount depends on the number of shares an investor owns, where one dividend equals a fraction of a share. An investor with 100 shares receives 10 additional shares if the issuing company distributes a 10% stock dividend. A stock dividend results in an issuance equal to or less than 25% of outstanding shares.
When a company issues a stock dividend, an amount equivalent to the value of the issued shares is deducted from retained earnings and capitalized to the paid-in capital account. The common stock and additional paid-in capital sub accounts are increased as if new shares had been issued. However, the increase is funded by the company’s equity rather than investors.
Example
Assume Company ABC issues a stock dividend to common stockholders, resulting in a total issuance of 10,000 additional shares. Each share has a par value of $1 and a market price of $15. The total value of the shares, $150,000, is deducted from retained earnings. Of this amount, $10,000 is allocated to the common stock sub account and the remaining $140,000 is allocated to additional paid-in capital.
Where Is Additional Paid-in Capital Recorded?
The APIC is usually shown as shareholders’ equity on the balance sheet.
What Is the Difference Between Par Value and Market Value of a Stock?
The par value is the value a company assigns to stock during an IPO, before there is a market for the security. Market value is the price a financial instrument is worth at a given time and dependent on supply and demand.
What Is the Difference Between Additional Paid-in Capital and Paid-in Capital?
APIC includes only the amount paid over the par value of stock issued during a company’s IPO. Paid-in capital encompasses the par value of both common and preferred stock plus any amount paid in excess.
The Bottom Line
Dividends allow companies to pay capital to shareholders. They can be paid out as cash or in the form of stock. Stock dividends are debited from a subaccount called the additional paid-in capital. Cash dividends do not affect APIC.