Scrooge Ltd.owns 100,000 shares of Marley Ltd.common shares, which are being accounting for by the equity method.On December 15, 2017, when Scrooge's "Investment in Common Shares of Marley Ltd." account has a carrying value of $5 per share, Scrooge declares all these shares to its shareholders as a property dividend, to be distributed on December 31, 2017.Scrooge had originally paid $8 for each share.Marley has 1,000,000 shares issued and outstanding, for which the quoted market price was $7 per share on the declaration date and $9 per share on the distribution date.Ignoring income taxes, what would be the reduction in Scrooge's shareholders' equity as a result of the above transactions?

Question

Quizplus · Accepted Answer

The reduction in Scrooge's shareholders' equity is the difference between the carrying value of the shares and the fair value of the shares on the distribution date. The carrying value of the shares is $500,000 (100,000 shares x $5 per share). The fair value of the shares on the distribution date is $900,000 (100,000 shares x $9 per share). Therefore, the reduction in Scrooge's shareholders' equity is $400,000 ($900,000 - $500,000).