[lex460]

Got a FAR question:

Here goes:

“Field declared and distributed a property dividend of inventory. The inventory had a 75,000 carrying value and a 60,000 fair market value.”

…Now, I’m thinking that this declared dividend will decrease RE by 60,000 the FMV, but in addition since the carrying value of the inventory is higher than the FMV, wouldn’t the inventory need to be impaired at a loss of 15,000?

So total impact to retained earnings would be 75,000, if net income didn’t account for the impairment. Am I right that it should be a 75,000 decrease in RE or is it just 60,000 reduction in RE for the dividend declared?

[gabe1475]

You are correct the decrease would be $75k to RE once the P&L accounts are closed to RE. It depends on how they word the the question. They could say what is the effect on RE for the year, or what is the impact from the dividend transaction. They can change one word which would change the answer, just read the questions carefully. Good luck on your exam.

FAR - 95
AUD - 82
REG - 94
BEC - 84

[lex460]

That's what I thought, effect on dividend would be FMV, but the effect on the total RE would be 75. Thanks

[Trevor]

Helpful hint I actually just reviewed… on a property dividend R/E will always be effected by the Book Value.. so yes you are correct

BEC: 73,81(7/6/2010); AUD: 75(5/24/2010); FAR: 76(8/31/2010); REG: 77 (10/18/2010) - DONE!!!!

[Author]

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