Question

Gibbs Corporation owned 20,000 shares of Oliver Corporation's $5 par value common stock. These shares were purchased in 2009 for $240,000. On September 15, 2013, Gibbs declared a property dividend of one share of Oliver for every ten shares of Gibbs held by a stockholder. On that date, when the market price of Oliver was $21 per share, there were 180,000 shares of Gibbs outstanding. What NET reduction in retained earnings would result from this property dividend?
a. $162,000 b. $378,000 c. $108,000 d. $216,000

Answer 1

Answer:

. $378,000

Explanation:

For every 10 shares of Gibbs, the stockholres receive 1 share of Oliver

There are 180,000 shares of Gibbs outstanding, so it will give as property dividends:

180,000 / 10 = 18,000 Oliver Shares

Each share has a market cost for 21 so, the dividends declared have a value of:

18,000 x 21 = 378,000

This will be recorded as follow:

when the dividends are declared:

Retained Earnings    378,000 debit

       Property Dividends Payable 378,000 debit

And when the stock delivered:

Property Dividends Payable 378,000 debit

     Oliver Investment                       378,000 credit