On June 1, 2018, Blue Co

question 150

Multiple Choice

On June 1, 2018, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red Inc, an unrelated party. The book value on Blue's books of Red's $1 par common stock was $2 per share. Immediately after the declaration, the market price of Red's stock was $2.50 per share. In its income statement for the year ended June 30, 2018, what amount should Blue report as gain before income taxes on disposal of the stock?

• A) $0.
• B) $100,000.
• C) $400,000.
• D) $500,000.

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Definitions:

Straight-Line Amortization

A method of uniformly reducing the book value of an intangible asset over its useful life.

Interest Expense

The expenditure faced by a company for financing through borrowed resources during a defined time.

Book Value

The value of a fixed asset, as recorded on a balance sheet, which represents its historical cost minus accumulated depreciation.

Debentures

A type of long-term debt instrument used by large companies to borrow money, at a fixed rate of interest, and not secured by physical assets or collateral.