Since stock dividends do not distribute corporate assets or affect the safety of creditors, legal restrictions on their declaration may be deemed less necessary than in the case of cash dividends. Yet a closer study discloses a real need for imposing limitations on stock dividends. Restrictions on stock dividends must of course be expected to be different from those applied against cash dividends, because of the different problems raised by the two types. Stock dividends involve the issuance of new shares, calling for the increase of capital stock and reduction of the surplus or profits from which they are declared. Stock dividends also result in a form of recapitalization. Where there is more than one class of stock outstanding, the realignment of net worth accounts may affect the participation rights of a particular class of stockholders in assets, in earnings, and in management. It is the purpose of the present paper to snmmarize the more important limitations on stock dividends under the existing American law as found in the statutes and decisions and to raise questions, where the occasion appears, concerning the efficacy of these systems of control from the standpoint of the public interest.

The article presents the broad front of accounting activity in several sectors where accounting work is moving forward. These sectors may be referred to as the professional field, the field of private finance and industry, the field of public finance, and the educational field. The article discusses the matters common to the whole of accounting work, in fulfilling the purpose of accounting, that is, to exhibit the financial position of a particular unit of activity, and to exhibit the financial results of the particular unit over a length of time. All other purposes may be fairly subsumed under one or the other of these two and considered as auxiliary matters of varying importance according to the time, and place. Accounting provides refined classifications, use of averages, ratios, per unit figures, and cost and budgetary control, as aids to management and other special groups. Diverse as are the phenomena with which accounting deals, its two major objectives predominate and give the entire field a definite unity. In reaching these objectives use is made of a medium of expression, a body of working principles, and a technique.

This article focuses on the accounting for stock dividends paid. It says that legal reasoning in relation to stock dividends is drawn in part from heir known effects and implications in business practice. These considerations constitute the central subject-matter of the present study. The plan is, first, to examine the subject from the standpoint of fundamental principles, and second, to use the principles as the basis for a rational theory of stock dividends. The present article deals with the payment of stock dividends, a subsequent article will be concerned with the receipt of stock dividends. Cash dividends paid must be well under annual earnings, thereby permitting accumulation of profits in the business. In a growing business, partial retention of earnings is generally forced upon the company. This is because expansion creates need for additional funds and earnings provide a readily available source of such funds. Moreover, partial retention of earnings is a necessary accompaniment to the introduction of senior capital under a system of conservative financing.

A trust of corporate shares is often created under a will or other instrument in which it is directed that income of the trust is to go to a life tenant and that after this person's death the principal is to go to a remainder-man. If the trust instrument neglects to specify what is meant by income that is to go to the life tenant, doubtful items must be settled by the trustee. Among such doubtful items few have caused trustees more difficulty than stock dividends and the problem of allocating them between income and principal. The problem has driven trustees generally to seek the guidance of courts of law. As a result, the volume of litigation on the subject has steadily mounted. Because divergent judicial rulings exist between several states and varying applications of a given rule are made in the same state, trustees have readily submitted the problem for solution by courts at the expense of the trust fund rather than to decide the matter themselves and then become personally liable to suit by some dissatisfied party to the trust.

It has been the author's observation that first-year accounting students have considerable difficulty in learning how to make calculations for the admission of a partner by investment. The calculations for goodwill or for bonus, and the journalizing of the results seem to contain somewhat more than ordinary difficulty. The method presented in the article is simple, yet it is reasonably complete. It sets forth the five possible cases in concrete form, permitting the student to realize that the whole procedure is actually easy. The process contains certain logical steps that aid the student in tasking and retaining it. In order to simplify the process for the sake of teaching it, the thought and expression "ignoring goodwill" is substituted for the ordinary conception and terra "bonus." It seems easier to build upon the idea of either recording or ignoring goodwill than to include the additional notion of bonus. After the subject has been discussed, the fact that the ignoring of good will means giving a bonus in ownership to someone can be made clear in one statement to the class.