Question

On June 1, 2021, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red Inc. which is an unrelated party. The book value on Blue's books of Red's $1 par common stock was $2.00 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, 2021, what amount should Blue report as gain before income taxes on disposal of the stock?

Answer 1

Blue Co. should report $100,000 gain.

Step-by-step explanation:

The difference between the carrying value of shares and Market value of shares is the gain / loss which Blue Co. should report before income taxes on disposal of the stock.

Carrying Value = 200,000 x $2 = $400,000

Market Value = 200,000 x $2.5 = $500,000

Gain = Market Value - Carrying Value

Gain = $500,000 - $400,000

Gain = $100,000