Winger Corporation owned 900,000 shares of Fegan Corporation.On December 31, 2012, when Winger's account "Investment in Fegan Corporation" had a carrying value of $5 per share, Winger distributed these shares to its shareholders as a dividend.Winger originally paid $8 for each share.Fegan has 3,000,000 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 equity as a result of the above transactions?

Question

Quizplus · Accepted Answer

Winger Corporation distributed 900,000 shares of Fegan Corporation as a dividend. The carrying value of each share was $5 per share, and the original cost of each share was $8. Therefore, the loss incurred for each share is $3 per share ($8-$5).

The fair market value of Fegan Corporation's share on the distribution date was $9 per share. Therefore, the total fair market value of Fagan shares distributed by Winger Corporation was $8,100,000 (900,000 shares x $9 per share).

Winger Corporation's equity will be reduced by the fair market value of the shares distributed, minus the carrying value of the shares at the distribution date. Thus, the reduction in Winger Corporation's equity will be $4,500,000 ($8,100,000 fair value - $3,600,000 carrying value). Therefore, the best choice is B, $4,500,000.

Winger Corporation Owned 900,000 Shares of Fegan Corporation