A company declared a property dividend. The property had a carrying amount of $40,000 and a fair value of $55,000 on the declaration date. What is the effect on Retained Earnings and Net Income?

Answer options:

Retained Earnings decreases by $55,000; Net Income increases by $15,000

Retained Earnings decreases by $40,000; Net Income no change

Retained Earnings decreases by $55,000; Net Income no change

Retained Earnings decreases by $40,000; Net Income increases by $15,000

How to approach this question

Property Dividends are recorded at Fair Value. <br/>Step 1: Adjust asset to Fair Value (Gain/Loss goes to NI). <br/>Step 2: Record Dividend at Fair Value (Debit RE).

Full Answer

A.Retained Earnings decreases by $55,000; Net Income increases by $15,000✓ Correct

When a property dividend is declared, the property must first be adjusted to its fair value, recognizing a gain or loss in Net Income ($55,000 - $40,000 = $15,000 Gain). Then, the dividend is recorded as a reduction of Retained Earnings at the fair value of the property ($55,000).

Common mistakes

Recording the dividend at book value.

Question 33 All questions Question 35

Practice the full CPA FAR Practice Exam 3

50 questions · hints · full answers · grading

More questions from this exam

Q01Dunn Corp. is preparing its Year 1 balance sheet. The following issues were identified during the...Hard Q02On October 1, Year 1, Host Co. approved a plan to dispose of a component of its business. The dis...Hard Q03Selected financial information for Zeno Corp. for the year ended December 31, Year 1:<br/>- Cost ...Medium Q04Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The...Hard Q05A company had the following equity transactions in Year 1:<br/>- Jan 1: 100,000 shares outstandin...Hard

View all 50 questions →