On June 1, 2009, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red, Inc., an unrelated party. The carrying amount 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 $2.50 per share. In its income statement for the year ended June 30, 2009, what amount should Blue report as gain before income taxes on disposal of the stock?
A)$ 0.
B)$100,000.
C)$400,000.
D)$500,000 Property dividends are recorded at the fair value of the property distributed, with any gain or loss being recognized in the current period.$2.50 - 2.00 = $.50 200,000 = $100,000.

Question

Quizplus · Accepted Answer

Property dividends are recorded at the fair value of the property distributed, with any gain or loss being recognized in the current period. The fair value of the stock is $2.50 per share, and the carrying amount is $2.00 per share. Therefore, there is a gain of $.50 per share. Blue distributed 200,000 shares, so the total gain before income taxes on disposal of the stock is $100,000 (200,000 x $.50).