In: Accounting
Apple Corporation owns 60,000 shares of common stock out of the 100,000 shares outstanding of common stock of Orange Corporation. On 1/1/2012, using the equity method, Apple recorded its investment in Orange on its book at $480,000. The book value of net assets of Orange Corporation on 1/1/2012 was $800,000. If on 1/2/2012 Orange Corporation repurchased 20,000 shares from outsiders at $6 a share, what adjustment would be needed for Apple’s “Investment in Orange” account after the repurchase?
$30,000 increase |
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$30,000 decrease |
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$72,000 increase |
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$72,000 decrease |
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No adjustment is needed |
BEFORE BUY BACK: ON 01/01/2012
TOTAL NO. OF SHARE OUTSTANDING OF COMMON STOCK OF ORANGE CORPORATION = 100000
NO. OF SHARE OWNS BY APPLE CORPORATION = 60000
BOOK VALUE OF NET ASSET OF ORANGE CORPORATION = $800000.
BY USING EQUITY METHOD, APPLE CORPORATION BOOKED INVESTMENT IN ORANGE CORPORATION
= $800000 / 100000 x 60000 = $480000
VALUE PER SHARE = &480000/60000 SHARE = &8 PER SHARE
OR
= $800000/100000SHARE = &8 PER SHARE.
ON 01/02/2012 ORANGE CORPORATION REPURCHASED 20000 SHARE AT $ 6 PER SHARE.
CALCULATION OF NET ASSET OF ORANGE CORPORATION AFTER REPURCHASED :
NET ASSET VALUE BEFORE REPURCHASED | $ 800000 |
LESS: PAYMENT FOR SHARE REPURCHASED (20000 Share x $ 6 /Sh) |
$ 120000 |
NET ASSET VALUE AFTER REPURCHASED | $ 680000 |
CALULATION OF NO. OF SHARE OUTSHANDING AFTER REPURCHASED:
NO. OF SHARE OUTSTANDING BEFORE REPURCHASED | 100000 |
LESS: NO. OF SHARE REPURCHASED | 20000 |
NO. OF SHARE OUTSTANDING AFTER REPURCHASED | 80000 |
VALUE PER SHARE AFTER REPURCHASED:
=$ 680000 / 80000Share = $ 8.5 PER SHARE
% OF SHARE REPURCHASED = 20000 / 100000 x 100 = 20%
NO. OF SHARE REPURCHASED FROM APPLE CORPORATION
= 60000 x 20% = 12000 Shares
... STOCK OWNS BY APPLE CORPORATION AFTER REPURCHASED = 60000 - 12000 = 48000 Shares
ALTERNATIVE 1
CALCULATION OF EFFECT OF SHARE REPURCHASED IN VALUE OF SHARES OWNS BY APPLE CORPORATION:
VALUE OF SHARES OWNS BY APPLE CORPORATION BEFORE REPURCHASED = 60000 x $ 8 = $ 480000
LESS: VALUE OF SHARES AFTER REPURCHASED = 48000 x $ 8.50 = ($ 408000)
DECREASE IN INVESTMENT IN ORANGE CORPORATION = $ 72000
ALTERNATIVE 2
CALCULATION OF EFFECT OF SHARE REPURCHASED IN VALUE OF SHARES OWNS BY APPLE CORPORATION:
VALUE OF SHARES REPURCHASED = 12000 Shares x $ 8 Per Share = $ 96000
LESS: INCREASE IN VALUE OF SHARE STILL OWNS = 48000 Shares x $ 0.50 Per Shares = ($ 24000)
DECREASE IN INVESTMENT IN ORANGE CORPORATION = $ 72000