[flop310]

I thought that when receiving stock dividends there was no income to report. But I dont understand why you do on this problem

Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 2009. Cobb received a stock dividend of 2,000 shares on March 31, 2009, when the carrying amount per share on Roe’s books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, 2009. In Cobb’s income statement for the year ended October 31, 2009, what amount should Cobb report as dividend income?

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A. $98,000

B. $88,000

C. $18,000

D. $15,000

Answer C is correct. No dividend revenue is recognized when an investor receives a proportional stock dividend, because the investor continues to own the same proportion of the investee as before the stock dividend. In addition the investee has not distributed any assets to the investor. Therefore, Cobb’s dividend income includes only the cash dividend received [(10,000 + 2,000) × $1.50 = $18,000].

*** I believe I’m misunderstanding this problem. 10,000 are the shares previously own and the 2,000 are the stock dividend received??

Please explain. Thank you!

[mrwills12]

The 10,000 shares is the original amount that he purchased in Feb. In March he got an additional 2,000 shares. So the total shares he currently has is 12,000. The stock dividend/stock splits are never taxable if they are in proportion to their ownership. Therefore they dont have to report any income up to this point.

So now the company decides to do a cash dividend of $1.50/share. Cash dividends, obviously, for a corporation are included in taxable income. Therefore you have to take the $1.50/share dividend and multiply it by the current amount of stock ownership 12,000. This gets you the $18,000

Note: There are 2 separate dividends in this problem, the cash dividend and the stock dividend. You are correct with the stock dividend it isnt taxable but remember there are 2 dividends in this problem. The 2nd dividend is a cash dividend and that is taxable in the circumstances in this problem.

FAR - 88 (Jul 2012)
AUD - 85 (Oct 2012)
BEC - 82 (Nov 2012)
REG - 92 (Jan 2013) DONE!

Using Becker Self Study 2012

[flop310]

Got it! Thank you so much!!

[Author]

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