Question

Lewis Industries owns 600,000 shares of Compton Corporation, which it originally purchased for $8 each. On December 1, 2020, Lewis declares it will distribute these shares to its stockholders as a dividend with a December 31 date of payment. The shares have a market price of $7 on the declaration date and $9 on the distribution date. If Lewis’ carrying value for the shares is $5, how much of a reduction in stockholders’ equity should it record as a result of this distribution?

Answer 1

The equity will decrease through retained earnigns for 3,000,000 dollars

Step-by-step explanation:

The company's accounting will distribute the shares at the carrying value of the shares which is $5 per share as for them that is how much they are worth.

600,000 shares x $5 each = $3,000,000

retained earnings 3,000,000 debit

investment on Comption 3,000,000 credit

The equity will decrease through retained earnigns for 3,000,000 dollars