Question

On January 31, 2020, Astrid Corp. purchased 5,000 shares of Sienna Co. common stock for $15 a share. Astrid accounts for the investment at fair value with adjustments to fair value recorded in net income. On March 15, 2020, Astrid Corp. declared a property dividend of 3,000 shares of Sienna Co. common stock, to be distributed on March 31, 2020. The shares of Sienna Co. were selling at $18 per share on March 15, 2020. The investment has not been adjusted to fair value since its purchase date. On the date of declaration of the property dividend, the Astrid Corp. would:
a. Recognize a liability account of $45,000.
b. Recognize a decrease in assets of $45,000.
c. Recognize an increase in net income of $9,000.
d. Recognize a liability account of $9,000.

Answer 1

Answer:

The correct option is c. Recognize an increase in net income of $9,000.

Explanation:

This can be determined as follows:

Common stock price per share on January 31, 2020 = $15

Common stock price per share on March 31, 2020 = $18

Fair value adjustment per share on March 31, 2020 = Common stock price per share on March 31, 2020 - Common stock price per share on January 31, 2020 = $18 - $15 = $3 gain

Fair value adjustment of declared a property dividend on March 31, 2020 = Number of shares declared as a property dividend on March 31, 2020 * Fair value adjustment per share on March 31, 2020 = $3,000 * $3 = $9,000 gain

Therefore, the correct option is c. Recognize an increase in net income of $9,000.