Question

McCaffrey Corporation owned 15,000 shares of Harper Corporation’s $5 par value common stock. These shares were purchased in 2015 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share of 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 retained earnings would result from this property dividend?

Answer 1

Answer:

Net reduction in retained earning = (304,267)

Explanation:

No. Of shares outstanding of McCaffrey = 280,000 shares

No. Of shares issued as property Dividend = 280,000/20×1 = 14,000 shares.

Market price of shares issued as property Dividend = 14000× 34 = $476,000

Cost of 14000 shares of Harper corporation = $ 326,000/15000×14000= $ 304,267

Net gain = 476,000- 304267 = $171,733

Property Dividend = $ 476,000

So, net reduction in retained earning = 171,733- 476,000 = (304,267)

Note:

Due to gain on issue of shares as property Dividend , retained earning increases . Because these shares are issued at more than they actually purchased.

Due to issue of shares as property Dividend , retained earning decrease because property divided decreases is declared from retained earning .