Stock dividend - transfer of RE to CC?

I’d appreciate if someone could explain why a stock dividend is considered to be a transfer of retained earnings to contributed capital account of shareholder’s equity?


Because retained earnings are used to issue new shares in this case.

For illustration, the equivalent transactions would be:

  1. pay cash dividend to shareholders (reduce cash on BS) and reduce retained earnings on BS

  2. shareholders use cash received in dividends to purchase new shares (increase cash on BS), increase paid-in capital

Transactions 1+2 are cash neutral, and result in reduction of retained earnings and equivalent increase in contributed capital.

Wow! I get it now. Thanks so much :slight_smile: