Final answer:
A stock dividend, like the one issued by Element Software Ltd, reconfigures the company's equity section by converting part of the retained earnings into additional share capital, but does not alter the total assets.
Step-by-step explanation:
The student has asked about the accounting treatment and the effect of a stock dividend distribution on a company's total assets.
The stock dividend has no impact on the overall total assets of Element Software Ltd, as it merely redistributes the shareholder's equity without changing the total assets.
When Element Software Ltd declares a 17% stock dividend, additional shares are issued to current shareholders proportionate to their existing shareholdings. The market value—or fair value—of the shares at the time of the dividend declaration is relevant for journalizing the transaction because it helps in assigning a value to the stock dividend. However, the issuance of a stock dividend does not involve any cash exchange or alteration of the company's assets or liabilities. Instead, part of the profits that would have been retained within the company is now converted into additional shares. The equity section of the balance sheet changes to reflect this adjustment, with an increase in the common stock and additional paid-in capital accounts, and a corresponding decrease in retained earnings.
The process involves a redistribution of the equity section, but the aggregate value of the equity remains the same. There is no inflow or outflow of resources, and hence, the total assets remain unchanged by the distribution of a stock dividend.