George Corporation owned 15,000 shares of Harper Corporation\'s $5 par value com
ID: 2426411 • Letter: G
Question
George Corporation owned 15,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2008 for $225,000. On October 4, 2012, George declared a property dividend of one share of Harper for every twenty shares of George held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of George outstanding. What NET reduction in retained earnings would result from this property dividend?
A. $210,000
B. $225,000
C. $476,000
D. $952,000
Could you explain the calculation, and why the answer is $210,000
Explanation / Answer
Number of shares held by George Corporation= 15,000 shares
Value of the share = $5
Purchase value of the shares = $ 2,25,000
Purchase value per share = $2,25,000/ 15000 shares
= $15 per share
Numbver of shares in George = 2,80,000 shares
Property dividend in terms of shares= 2,80,000 shares/ 20
= 14,000 shares
Hence intial purchase price per share = $15 per share
Net reduction in retained earnings will be = 14000 shares * $15
= $ 2,10,000
Note : Though the pricee of the share was $34, we need to adjust the retained earnings subject to purchase price of the share.And the George corporation gives the dividend in terms of exchange of shares,hence no profit involved like in case of sale of shares.
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