Question

Clearwater, Inc. decided to split-off its subsidiary Kamiah Co. On January 31, Clearwater, Inc. tendered 14,400 shares of Kamiah Co.’s $5 par value stock to its current shareholders in a non pro rata distribution. On the day of the offer, Kamiah Co. was trading for $81 a share. Clearwater, Inc. had the investment in Kamiah Co. recorded at $1,500,000 on its balance sheet.

What would Clearwater, Inc. record on its income statement as a result of this transaction?

Select one:

a. $72,000 loss

b. $333,600 loss

c. $72,000 gain

d. No gain or loss is recorded on split-offs.

e. $333,600 gain

Answer 1

Answer: ( B) $ 333,600 Loss

Explanation:

1) In a non-pro rata split-off, the parent’s treasury stock account is increased by the marketvalue of the subsidiary’s shares.

2) Since this will not necessarily match the amount the parent has the subsidiary recorded at on its books, a gain or loss is recorded on the sale on the income statement.

3) In this case, we calculate it as follows:

14,400 × $81 = $1,166,400  increase to treasury stock.

4)$1,500,000 – $1,166,400

= $333,600 loss on the income statement