Question

14. McCaffrey Corporation owned 14,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2010 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share Harper for every twenty shares of McCaffrey stock held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of McCaffrey outstanding. What net reduction in retain earnings would result from this property dividend? (LO 3) (a) $150,000 (b) $176,000 (c) $326,000 (d) $476,000

Please explain why

Answer 1

280,000 20 Shares owned by McCaffrey Corporation = 14,000 Shares purchasing cost of shares in 2010 = $ 326,000 market price of Harper - $34 per shave Shares of McCaffrey outstanding = 280,000 • Number of shares issued as property dividend = 14,000 Shares o market price of Shares issued as property dividend = 14,000 shares X $34 = $476,000 cost of 14,000 shares of Harper Corporation = $326,000 Net gain = $476,000 – $326,000 = $ 150,000 property dividend = $476,000 Hence, net reduction in retained earning = $150,000 - $ 476,000 E $326,000 Retained earnings is increased by the unrealized gain of – 150,000 and decreased by fair value of Shares distributed for a net reduction of $326,000