• Explanation

Dividends are distributions to shareholders of accumulated earnings (retained earnings). When any type of dividend is declared, retained earnings are decreased. Instead of offering a cash or stock dividend, a company may choose to distribute one of its assets (ie, real estate, marketable securities). This type of distribution, a property dividend, is considered a nonreciprocal transfer to the shareholders.

GAAP requires nonreciprocal transfers of property to be recorded at the asset's fair value (FV) and any gain/loss recognized as if the asset was sold. Recording a property dividend on date of declaration requires a two-step process on the date of declaration:

• Adjust the asset to its FV near (or at) the time of distribution (typically the date of declaration). If the FV differs from the net carrying value (ie, net book value), a gain or loss is recognized.
• Record the liability (ie, dividends payable) and reduce retained earnings for the property's FV.

In this scenario, the FV of the land on date of declaration is used to value the dividend, resulting in a $200,000 ($700,000 − $500,000) increase to the investment in land. The gain is recorded with a debit to the investment in land and credit to the gain on the sale (Choice A). Once the investment is revalued at FV, the dividend is recorded as a $700,000 debit to retained earnings and a credit to dividends payable in the same amount (Choice B).

(Choice D) The investment in land is credited for $700,000 on the date the land is distributed.

Things to remember:
Property dividends are recorded at the fair value (FV) of the property on the date of declaration. If the FV differs from the net carrying value, a gain or loss is recognized. Retained earnings are decreased by the FV of the property on the date of declaration.