Question

Raptor Corporation declares a dividend permitting its common shareholders to elect to receive 9 shares of cumulative preferred stock or 3 additional shares of Raptor common stock for every 10 shares of common stock held. Raptor has only common stock outstanding (fair market value of $45 per share). One shareholder elects to receive preferred stock, while the remaining shareholders choose the common stock.

Raptor wants to know whether the shareholders recognize any gross income on the receipt of the stock. Answer please.

Answer 1

In the given question, Raptor Corporation has declared the dividend for it's stockholders and it is asking whether the shareholders should recognizes the revenue on the receipt of stock.

Now, let us understand first the conditions to be satisfied to recognize a revenue in the books - first, The receipt of income should be certain. second, the amount should be determinable.

In the given case, the company has declared the divided which means it has become certain that the dividend will come in the hands of shareholders. further, the amount is also determinable as there is some market value of the shares. Both the conditions are satisfied here. Therefore, the shareholders must recognize this as income in their books. They may pass this entry -

Shares of Rapton corporation A/c Dr.    (Fair value of the shares)

                 To Dividend Income A/c

(Being dividend received in form of shares)

Ask me if there is any doubts.