Question

Part b
Despot declared a property dividend to give shares of Orange Computer to its common stockholders. The following
information is available about Despot’s investment in Orange shares:
 Despot paid $7 million for its original investment in Orange
 On the date of declaration, the Orange shares have a fair market value of $16 million.
 On the date of distribution/payment, the Orange shares have a market value of $14 million
Required
Show Despot’s journal entries to record the property dividend on:
1) The date of declaration
2) The date of record
3) The date of distribution/payment

Answer 1

Journal Entries

1) On date of declaration

Investment in Orange Shares $9 million

Gain on appreciation of Orange Shares $9 million

(Gain on the shares decided to distribute as dividend now recognised; 16m - 7m)

Retained Earnings $16 million

Property Dividend Distributable $16 million

(Property Dividend declared)

2) Date of record

No Entry

3) Date of distribution

Property Dividend Distributable $16 million

Investment in Orange shares $16 million

(Property dividend distributed)

Note :

Fair value of shares on date of distribution should not be taken into consideration.

Assuming that the investment in Orange shares are recorded at cost, hence the total gain (FMV-Cost) is recognized on date of declaration.