Question

Trendler, Inc. transferred to stockholders some of its equity investments costing $1,250,000 by declaring a property dividend on December 28, 2019, to be distributed on January 30, 2020, to stockholders of record on January 15, 2020. At the date of declaration, the securities have a fair value of $2,000,000. What is the journal entry for the date of declaration?

Answer 1

The journal entry for the declaration of the property dividend by Trendler, Inc. includes a debit to Retained Earnings for the fair value of the equity investments, a credit to Investments for their cost, and a credit to Gain on Distribution of Investments for the difference between the fair value and cost.

Step-by-step explanation:

The journal entry on the date of declaration for Trendler, Inc.'s transfer of equity investments to stockholders as a property dividend involves recognizing the increase in value of the investments from their cost to fair value. On December 28, 2019, Trendler, Inc. declared a property dividend to be distributed on January 30, 2020, with a record date of January 15, 2020. The equity investments had an initial cost of $1,250,000 and a fair value of $2,000,000 at the time of declaration. The journal entry to record this would be:

• Debit Retained Earnings for $2,000,000 (fair value of the equity investments).
• Credit Investments for $1,250,000 (cost of the equity investments).
• Credit Gain on Distribution of Investments for $750,000 (the difference between fair value and cost).

This entry would recognize a capital gain of $750,000, which is the increase in value of the investments from their cost to the fair value at the time of the dividend declaration. The gain on distribution is credited because it reflects the increase in wealth to the stockholders that will be realized when they receive the property dividend.