Question

5. 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

Answer 1

$100,000

Step-by-step explanation:

Data provided in the question:

Number of outstanding common shares = 200,000

Book value per share of the stocks = $2

Market price per share of the stocks = $2.50

Now,

Gain on disposal of the stock will be

= Number of stock outstanding × (Market price - Book value per share)

= 200,000 × ( $2.50 - $2)

= 200,000 × $0.50

= $100,000

Hence,

Blue Co. should report $100,000 as gain before income taxes on disposal of the stock