On June 1,2016,Blue Co.distributed to its common stockholders 200,000 outstanding common shares of its investment in Red,Inc. ,an unrelated party.The book value on Blue's books of Red's $1 par common stock was $2 per share.Immediately after the declaration,the market price of Red's stock was $2.50 per share.In its income statement for the year ended June 30,2016,what amount should Blue report as gain before income taxes on disposal of the stock?
A)$ 0.
B)$100,000.
C)$400,000.
D)$500,000.

Question

Quizplus · Accepted Answer

The gain on disposal of Red's shares is the difference between the market price ($2.50) and the book value ($2) per share, multiplied by the number of shares distributed (200,000):
Gain = ($2.50 - $2) x 200,000 = $100,000
Therefore, Blue should report a gain before income taxes of $100,000 on disposal of the stock in its income statement for the year ended June 30, 2016.