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On June 27, 2021, American Airlines distributed to its common shareholders 590,000 outstanding common shares of its investment in Kraft Foods. The book value on American Airline's books of Kraft's $1 par common stock was $3.90 per share. Immediately after the distribution, the market price of Kraft's stock was $4.40 per share. In its income statement for the year ended June 30, 2023, what amount should American Airlines report as gain on disposal of the stock (ignore taxes)?

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Answer:

$295,000

Explanation:

Given the information:

  • Total outstanding common shares: 590,000
  • Shares value before deal = $3.9
  • Shares value after deal = $4.4

The amount should American Airlines report as gain on disposal of the stock (ignore taxes) can be calculated as following formula:

Gain amount on disposal = Total number of shares × Difference in share value

= 590,000*($4.40 - $3.90)

= $295,000

Hence, gain on disposal of the stock of American Airlines is $295,000

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