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JD7612
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Joined: 11 Sep 2010
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Posts: 122

Posted: 27 Sep 2011 at 16:39 \| IP Logged

Can someone help me with the JE for this question? Thank you.

On 06/27/11, B Co. distributed to its common stockholders 100k outstanding common shares of its investment in Q, Inc., an unrelated party. The carrying amt on B's books of Q's $1 par common stock share was $2 per share. Immediately after the distro, the market price of Q's stock was $2.50. In its I/S for the year ended 06/30/11, what amount should B report as gain before income taxes on disposal of stock? Answer: 50,000.

Is it this:

DR Investment 150k, CR Gain on Investment 150k

DR Ret Earnings 250k, CR Div Payable 250k

DR Div Payable 250k, CR Investment 250k

chatterr
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Joined: 17 Nov 2010
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Posts: 67

Posted: 29 Sep 2011 at 21:22 \| IP Logged

Hello JD7612,

I would make the following Journal entry.

   On the declaration date,
Debit Retained Earnings 250,000
                             Credit Dividends Payable   250,000

   Investment Dr 50,000
         Gain on Investment Cr. 50,000

On the payment date, the entry is

Dividends Payable Dr. 250,000
              Investment Cr                250,000

Tony90504
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Joined: 02 Sep 2011
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Posts: 13

Posted: 01 Oct 2011 at 03:12 \| IP Logged

and nominal closing wise... your RE balance will be reduced
by 200,000 (I think some wiley question asked you that too)

chatterr
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Joined: 17 Nov 2010
Online Status: Offline
Posts: 67

Posted: 01 Oct 2011 at 11:46 \| IP Logged

Yes, that is correct.

Retained earnings is decreased by the fair market value of investments on the declaration date which is 250,000.

And retained earnings is increased by the gain on investment, which is 50,000.

The net effect is 250,000- 50,000= 200,000

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