Question

Jack Company owned 20,000 shares of King Company that were purchased in 2014 for $500,000. On May 1, 2018, Jack Company declared a property dividend of 1 share of King for every 10 shares of Jack stock. On that date, there were 50,000 shares of Jack stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution.

By how much is retained earnings reduced by the property dividend?

Answer 1

$150,000

Step-by-step explanation:

Jack will distribute 50,000 shares / 10 = 5,000 shares

to determine the amount by retained earnings should decrease we must multiply 5,000 times the market value on the sate of declaration = 5,000 shares x $30 = $150,000

Retained earnings accounts includes all the accumulated earnings after dividends have been distributed. Dividend distributions always lower retained earnings account since without any credit balance in that account, dividends cannot be distributed.