Final answer:
A stock dividend, sometimes referred to as a scrip dividend or bonus issue, reallocates retained earnings to the common stock account but has no impact on total owners' equity. Assets or liabilities are not affected, only the amounts within equity are shifted, thus the value of the investment remains the same.
Step-by-step explanation:
A stock dividend that is known as a scrip dividend or bonus issue has no effect on the total owner's equity. Unlike cash dividends, a stock dividend involves the distribution of additional shares of the company's stock to existing shareholders, in proportion to their current holdings. When a company issues a stock dividend, it transfers a portion of its retained earnings to the common stock account. However, there is no outflow of resources such as cash; instead, the company is merely reallocating parts of its equity. This type of dividend is often used when the company wishes to reward shareholders but wants to conserve cash for other uses.
In accounting terms, the stock dividend does not decrease assets or increase liabilities; rather, it shifts amounts within the shareholders' equity section of the balance sheet. Therefore, the overall equity balance remains the same after the dividend. This is why owner's equity is not affected by the issuance of a stock dividend. It's essential to note that while the number of shares increases, the overall value of each shareholder's investment remains constant due to the proportional nature of the distribution. This concept is important for anyone studying corporate finance or anyone involved in managing a business's finances.