Question

Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were purchased in 2011 for $90,000. On November 15, 2015, Pierson declared a property dividend of one share of Hunter for every ten shares of Pierson held by a stockholder On that date, when the market price of Hunter was $28 per share, there were 90,000 shares of Pierson outstanding What gain and net reduction in retained earnings would result from this property dividend?

Answer 1

Answer:

Gain in retained earnings = $171,000

Net reduction = $81,000

Explanation:

Data provided;

Number of shares owned = 10,000

Purchasing cost of the shares = $90,000

Declared property dividend for every 10 share = 1 share

thus,

for 90,000 Outstanding shares Declared property dividend

= $\frac{90,000}{10}$ = 9,000

Market price per share = $28

Outstanding shares = 90,000

Now,

Gain in retained earnings

= ( Market price per share - Purchasing price per share ) × Declared property dividend

= ( $28 - $\frac{\ 90,000}{10,000}$ ) × 9,000

= 171,000

and,

Net reduction = Market price - Gain

= $28 × 9,000 - $171,000

= $81,000