ABC declared a property dividend. The dividend consisted of 10,000 common shares of its investment in XYZ Company. The shares had originally been purchased at $4 per share and had a $1 par value. The value of the shares on the declaration date is $7 per share. What is the first entry that should be recorded related to this dividend? a. Retained earnings 70,000 Property dividends payable 70,000 b. Retained earnings 70,000 Property dividends payable 40,000 Gain 30,000 c. Investment in XYZ 30,000 Retained earnings; 30,000 d. Investment in XYZ 30,000 Gain 30,000

D. Investment in XYZ 30,000 Gain 30,000

Explanation:

The value of shares have increased from $4 to $7. Which means they are now increased by 30,000 (10,000 x $3). The question refers to the increase in value of Shares rather than buying them at new value and therefore, Option A is incorrect.

While the question does mentions declaration of property dividend, it does not mention by how much the same was paid. Hence, the entry of Option B is also incorrect.

When value of Shares are increased then it results in Gain in Shares and effects the Balance Sheet rather than the Income Statement. Therefore, the entry recording Retained Earnings in Option C is incorrect.

Option D is correct, as the Investment in XYZ has increased by 30,000 and simultaneously it has resulted in Gain by 30,000. Hence, this is the first entry that should be recorded.

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