In 20X5, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X6, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X6, payable on February 15, 20X6. During 20X6, the Oil stock had the following market values:

January 15
$25,000
February 1
26,000
February 15
24,000

The net effect of the foregoing transactions on retained earnings during 20X6 should be a reduction of

a) $20,000

b) $24,000

c) $25,000

d) $26,000

c) $25,000

Explanation:

A property dividend should be recorded in retained earnings at the property's  market value at date of declaration.

The date of declaration is the date on which the firm has made the commitment to pay the dividend. The market value on this date is the value that was considered when the board made the decision to distribute a property dividend and thus is the appropriate measure of the sacrifice to the firm.

In application to the scenario, the property dividend will be recorded in retained earnings at the market value at the date of declaration which is Jan 15 NOT on the day it is payable.

Hence, retained earnings will reduce by $25,000

In 20X5, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of $20,000. On January 15, 20X6, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, 20X6, payable on February 15, 20X6. During 20X6, the Oil stock had the following market values:  

January 15

$25,000

February 1

26,000

February 15

24,000