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Problem 2 (Property Dividend) Goodie Corporation owns 20,000 shares of JFC Corporation recorded as “Investment in...

Problem 2 (Property Dividend)

Goodie Corporation owns 20,000 shares of JFC Corporation recorded as “Investment in JFC Corporation” amounting to P 1.1 million as of December 31, 2019.

On December 15, 2020, Goodie Corporation declared a property dividend to shareholders of record of December 30, distributable on January 5, 2021. The corporation will distribute three (3) ordinary shares of JFC Corporation for every share of Goodie Corporation owned by the shareholders. Goodie Corporation has 5,000 issued and outstanding shares at the time of declaration. The carrying value of JFC as of December 15, 2020 is 60 per share.

The fair market value of JFC Corporation as follows:

December 15 – 65 per share; December 31 – 67 per share; January 5 – 66 per share.

Requirement:

Journalize the transactions occurred in relation to property dividends.
What will be the gain or loss on January 5, 2021?

Expert Solution

Following are the journal entries recorded in the books

The journal entry on the date of declaration to account for the 9,75000 Rs increase in the securities' value would be as follows:

	Debit	Credit
Marketable Securities	150,000
Gain on Marketable Securities		150,000

Since retained earnings are used to fund the dividend, a second journal entry is needed on the date of declaration.

	Debit	Credit
Retained Earnings	9,75000
Property Dividends Payable		9,75000

On 15^th December the following journal entry is made to reflect the distribution of the property dividend to shareholders:

	Debit	Credit
Dividends Payable	9,75000
Marketable Securities		9,75000

Working Notes:-

No. Of shares On Which Dividend Is distributed Is 15000 Shares

Fair Market Value Of shares as on date of declaration of dividend is 15000*65 Per Share

As per Mentioned in the Question that is 9,75000 in Rupees form

Total Gain On the date of 5^th December 2020 is Rs. 1,50000

Valuation of shares

Total value of share 1.1 million in rupess term 11,00,000

Total No. of share 20000

Per share value 55 per share (11,00,000/20000)

Total Share 15000 alloted to share holeders so the book value is 15000* 55

i.e 8,25000.

ekkarill92 answered 1 year ago

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