Question

Clayton Co. owned 10,000 common shares of Dayton Corporation purchased in 2005 for 180,000. On September 20, 2008, Clayton declared a property dividend of 1 share of Dayton for every 5 shares of Clayton stock held by a stockholder. On that date, there were 50,000 common shares of Clayton outstanding, and the market value of Dayton shares was30 per share. The entry to record the declaration of the property dividend would include a debit to Retained Earnings of

Answer 1

To record the property dividend declaration, Clayton Co. will debit Retained Earnings for the market value of the distributed Dayton Corporation shares, which is $300,000.

Step-by-step explanation:

The student has asked about the amount that would be debited to Retained Earnings when Clayton Co. declares a property dividend consisting of shares of Dayton Corporation. To determine this, we must know how many shares of Clayton stock are outstanding, the ratio of the property dividend, and the market value of Dayton shares on the date of declaration.

With 50,000 shares of Clayton Co. outstanding and a 1 for 5 dividend ratio, the company will distribute 10,000 shares (50,000 / 5) of Dayton to its shareholders. Given the market value of Dayton shares is $30 per share on the declaration date, the total market value of the dividend is 10,000 shares * $30/share = $300,000. The original cost of 10,000 Dayton shares to Clayton was $180,000. Thus, the property dividend results in a $120,000 gain (300,000 market value - 180,000 cost).

Since the property dividend is distributed at current market value, the debit to Retained Earnings reflects the market value of the dividend. Therefore, the entry includes a debit to Retained Earnings for $300,000.