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In: Accounting

Play Company acquired 70 percent of Screen Corporation's shares on December 31, 20x5, at underlying book...

Play Company acquired 70 percent of Screen Corporation's shares on December 31, 20x5, at underlying book value of $98,000. At the date, fair value of the noncontrolling interest was equal to 30 percent of the book value of Screen Corporation. Screen's balance sheet on January 1, 20x8, contained the following balances:

Cash 50,000

Accounts Receivable 35,000

Inventory 40,000

Building/Equipment 300,000

Less:Accumulated Depreciation (100,000)

Total Assets 325,000

Accounts Payable 40,000

Bonds Payable     100,000

Common Stock 50,000

Additional Paid-In Capital 75,000

Retained Earnings 60,000

Total Liabilities and Equities 325,000

On January 1, 20x8, Screen acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share.

1. Based on the preceding information, what is the increase in the book value of the equity attributable to the parent as a result of the repurchase of shares by Screen Corporation?

2. Based on the preceding information, what will the journal entry to be recorded on Play Company's books to recognize the change in the book value of the shares it holds?

Solutions

Expert Solution

1. As on Jan 1, 20x8 before the repurchase, the below is the balance sheet provided and the share of Play Company is given below:

Assets Amount $ Liabilities Amount $
Cash             50,000 Stock                              50,000
Account Receivable             35,000 Addl Paid up Capital                              75,000
Inventory             40,000 Retained Earnings                              60,000
Building          3,00,000 Acc Payable                              40,000
Less Acc Dep        (1,00,000) Bonds Payable                           1,00,000
Total          3,25,000 Total                           3,25,000
Net book value                           1,85,000
Share of Play Company- 70%                           1,29,500

After the repurchase of shares , $ 30,000 is spent by Screen for the buy back. The revised balance sheet and the share of Play company is given below. The Share of Play company increases due to the repurchase to 87.5%.

Assets Amount $ Liabilities Amount $
Cash             20,000 Stock                              40,000
Account Receivable             35,000 Addl Paid up Capital                              55,000
Inventory             40,000 Retained Earnings                              60,000
Building          3,00,000 Acc Payable                              40,000
Less Acc Dep        (1,00,000) Bonds Payable                           1,00,000
Total         2,95,000 Total                           2,95,000
Net book value                           1,55,000
Share of Play Company (87.5%)                             1,35,625
Increase                                6,125

Hence the increase in the book value is $ 6,125.

2. If Play Company is using equity method of accoutning and since they have not contributed any cash for increasing the stake in the company, no journal entries will be required to be passed in their books with respect to the investment account.

ekkarill92 answered 1 year ago
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