In 20X5, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X6, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X6, payable on February 15, 20X6. During 20X6, the Oil stock had the following market values: January 15$25,000February 126,000February 1524,000The net effect of the foregoing transactions on retained earnings during 20X6 should be a reduction of a) $20,000 b) $24,000 c) $25,000 d) $26,000

Question

Yuliana Chung

Business

18 July, 08:52

In 20X5, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X6, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X6, payable on February 15, 20X6. During 20X6, the Oil stock had the following market values: January 15$25,000February 126,000February 1524,000The net effect of the foregoing transactions on retained earnings during 20X6 should be a reduction of a) $20,000 b) $24,000 c) $25,000 d) $26,000

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Maritza · Answer 1

b) $24,000

Explanation:

The property dividends are an alternative to cash and stock dividends. Usually because, the firm doesn't have enought cash to give a wealthy dividend so it gives shares of a subsidiary, marketable securities or real state.

They can recognize a gain or sale on the asset, because it will be valued at market value at the time of the distribution. At the time of the distribution, the Oil Corp shares are valued at 24,000 The accounting should represent the reality. This is, dividends were given for 24,000

Adjustment will be made to show the property dividends on 24,000

recognize a gain on oil Corp investmest for 4,000

and the decrease on RE for 24,000