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?

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.