Question

In: Accounting

Apple Corporation owns 60,000 shares of common stock out of the 100,000 shares outstanding of common...

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
		$30,000 decrease
		$72,000 increase
		$72,000 decrease
		No adjustment is needed

Expert Solution

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

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