Question

On June 1, 2021, Blue Co. distributed to its common stockholders 190,000 outstanding common shares of its investment in Red Inc. which is an unrelated party. The book value on Blue’s books of Red's $1 par common stock was $1.30 per share. Immediately after the declaration, the market price of Red's stock was $3.30 per share. In its income statement for the year ended June 30, 2021, what amount should Blue report as gain before income taxes on disposal of the stock? (Do not round your intermediate calculation.)

Answer 1

Answer:

The correct answer is $380,000.

Explanation:

According to the scenario, the given data are as follows:

Number of stock outstanding = 190,000 shares

share value before = $1.30

Share value after deal = $3.30

So, we can calculate the gain before income taxes by using following formula:

Gain before income taxes = Gain = Number of stock outstanding × Difference in both share price

By putting the value, we get

= 190,000 × $(3.30 - $1.30)

= 190,000 × $2

= $380,000