Question

Diamond’s Corporation has an investment in 5,000 shares of Sigmond Company common stock with a cost of $218,000. These shares are used in a property dividend to stockholders of Diamond’s. The property dividend is declared on May 25 and scheduled to be distributed on July 31 to stockholders of record on June 15. The market value per share of Sigmond stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of this property dividend on retained earnings is a reduction of _______.a. $340,000.
b.$330,000.
c.$315,000.
d.$218,000.

Answer 1

Answer:

d.$218,000.

Explanation:

5,000 shares x $68 each = 340,000

cost of the shares                (218,000)  

net gain                                 122,000

the company recognize this gain and then it distribute the shares:

sigmond invesmtent 122,000 debit

        RE                                122,000 credit

RE          340,000 debit

   sigmond investment 340,000 credit

reduction for retained earnings:

+122,000 gain

-340,000 shares

218,000