Question

Albuquerque, Inc., acquired 27,000 shares of Marmon Company several years ago for $900,000. At the acquisition date, Marmon reported a book value of $980,000, and Albuquerque assessed the fair value of the noncontrolling interest at $100,000. Any excess of acquisition date fair value over book value was assigned to broadcast licenses with indefinite lives. Since the acquisition date and until this point, Marmon has issued no additional shares. No impairment has been recognized for the broadcast licenses. At the present time, Marmon reports $1,070,000 as total stockholders' equity, which is broken down as follows: Common stock ($10 par value) Additional paid-in capital Retained earnings Total $ 300,000 370,000 400,000 $1,070,000 View the following as independent situations: a. & b. Marmon sells 15,000 and 6,000 shares of previously unissued common stock to the public for $40 and $26 per share. Albuquerque purchased none of this stock. What journal entry should Albuquerque make to recognize the impact of this stock transaction? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round your intermediate calculations.)

Answer 1

a. Marmon sells 15,000 shares for $40

Shareholding pattern in Marmon

Total shares 30,000 100%

Albuquerque's share 27,000 90%

Non-controlling interest 10%

Fair value of the subsidiary

Acquisition cost $900,000

Non-controlling interest   $100,000

Difference in Stockholders Equity $90,000

($1,070,000 - $980,000)

Total Fair Value $1,090,000

Issue of shares (15,000 * $40) $600,000

Revised Fair Value $1,690,000

Revised Albuquerque's share 60%

(27000 / 45000) * 100

Albuquerque's investment by equity method before issue = [900,000 + (90,000 * 90%)] = $981,000

Albuquerque's investment by equity method after issue = 60% * $1,690,000 = $1,014,000

Increase in Albuquerque's investment = $1,014,000 - $981,000 = $33,000

Journal Entry   

Investment in Marmon 33,000

           Additional Paid-In Capital 33,000

b. Marmon sells 6,000 shares for $26

Fair value of the subsidiary

Acquisition cost $900,000

Non-controlling interest   $100,000

Difference in Stockholders Equity $90,000

($1,070,000 - $980,000)

Total Fair Value $1,090,000

Issue of shares (6,000 * $26) $156,000

Revised Fair Value $1,246,000

Revised Albuquerque's share 75%

(27000 / 36000) * 100

Albuquerque's investment by equity method before issue = [900,000 + (90,000 * 90%)] = $981,000

Albuquerque's investment by equity method after issue = 75% * $1,246,000 = $934,500

Decrease in Albuquerque's investment = $934,500 - $981,000 = $46,500

Journal Entry   

Additional Paid-In Capital 46,500

  Investment in Marmon 46,500