What gain and net reduction in retained earnings would result from this property dividend?
Answer:
To calculate the gain and net reduction in retained earnings resulting from the property dividend, we need to determine the fair value of the shares that Bramble distributed.
Since Bramble owned 35,000 shares of Blossom Corporation and the property dividend was one share of Blossom for every ten shares of Bramble, Bramble distributed 3,500 shares of Blossom to its stockholders (35,000 ÷ 10 = 3,500).
The fair value of the 3,500 shares of Blossom that Bramble distributed is:
3,500 shares × $27 per share = $94,500
To determine the gain, we need to compare the fair value of the shares distributed ($94,500) to their carrying value on Bramble's books, which is the cost of the original investment ($315,000). Since the fair value is less than the carrying value, there is no gain or loss recognized.
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