Justings Co

question 16

Multiple Choice

Justings Co. owned 80% of Evana Corp. During 2013, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should

• A) not recognize a gain on the sale of the land since it was made to a related party.
• B) recognize a gain of $17,600.
• C) defer recognition of the gain until Evana sells the land to a third party.
• D) recognize a gain of $8,000.
• E) recognize a gain of $22,000.

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Definitions:

Optimal Capital Budget

The set of projects that maximizes the value of the firm.

Retained Earnings

The portion of a company’s net profits which is kept within the company instead of being paid out to the shareholders as dividends.

Dividend Reinvestment Plans

Programs that allow investors to automatically reinvest their cash dividends into additional shares or fractional shares of the underlying stock.

Open Market

A freely competitive market where buyers and sellers can engage in transactions with minimal government intervention.