Question

ZIP Company owns 46,000 shares of the common stock of PIK Company. ZIP decided to divest itself of this investment by distributing the PIK shares in the form of a property dividend. The dividend ratio is one share of PIK for every four shares of ZIP common held by shareholders. ZIP has 184,000 common shares outstanding. On April 15, 2016, the date of declaration, PIK stock had a par value of $5 per share, a book value of $12.6 per share, and a market value of $17.6 per share.

Required:
1. Prepare any necessary journal entries. The shares were distributed on May 15, 2016, to stockholders of record on May 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.
2. Record appreciation of investment.
3. Record declaration of property dividend.
4. Record the entry on date of record.
5. Record the payment of the property dividend.

Answer 1

Answer and Explanation:

The journal entries are shown below:

2 On April 15,2016

Investment in PK common stock Dr (46,000 × ($17.6 - $12.6)) $230,000

To Gain on investment $230,000

(Being appreciation of investment is recorded)

3. On April 15,2016

Retained earnings Dr (184,000 ÷ 4 × $17.6) $809,600

To Property dividend payable $809,600

(Being declaration of property dividend)

4. No journal entry is required for date of record

5. Property dividend payable Dr $809,600

To Investment in PK common stock $809,600

(Being the payment of the property dividend is recorded)