Winger Corporation owned 600,000 shares of Fegan Corporation stock. On December 31, 2014, when Winger's account "Equity Investments (Fegan Corporation") had a carrying value of $5 per share, Winger distributed these shares to its stockholders as a dividend. Winger originally paid $8 for each share. Fegan has 2,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for a Fegan share was $7 on the declaration date and $9 on the distribution date.What would be the reduction in Winger's stockholders' equity as a result of the above transactions?

Question

Quizplus · Accepted Answer

To determine the reduction in stockholders' equity, we need to calculate the fair value of the shares at the distribution date, which is $9 per share.

Number of shares distributed = 600,000 
Fair value per share = $9 
Total fair value = 600,000 x $9 = $5,400,000

Winger's cost of the shares was $8 per share, so the total cost of the shares distributed was:

600,000 x $8 = $4,800,000

The reduction in stockholders' equity is the difference between the fair value and the cost of the shares distributed:

$5,400,000 - $4,800,000 = $600,000

Therefore, the correct answer is B) $3,000,000. (As Winger distributed 600,000 shares * $5 per share carrying value = $3,000,000).

Winger Corporation Owned 600,000 Shares of Fegan Corporation Stock