Watson Corporation owned 600,000 shares of Nixon Corporation stock. On December

Question

Watson Corporation owned 600,000 shares of Nixon Corporation stock. On December 31, 2012, when Watson's account "Investment in Common Stock of Nixon Corporation" had a carrying value of $5 per share, Watson distributed these shares to its stockholders as a dividend. Watson originally paid $8 for each share. Nixon has 2,000,000 shares issued and outstanding, which are traded on a national stock exchange. The quoted market price for a Nixon share was $7 on the declaration date and $9 on the distribution date. What would be the reduction in Watson's stockholders' equity as a result of the above transactions?
a. $2,400,000.
b. $3,000,000.
c. $4,800,000.
d. $5,400,000.

Explanation / Answer

reduction in Watson's stockholders' equity as a result of the above transactions = amount of dividend paid= 600,000*( $9-$5) = $2,400,000 a. $2,400,000.

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