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Albuquerque, Inc., acquired 24,000 shares of Marmon Company several years ago for $720,000. At the acquisition...

Albuquerque, Inc., acquired 24,000 shares of Marmon Company several years ago for $720,000. At the acquisition date, Marmon reported a book value of $870,000, and Albuquerque assessed the fair value of the noncontrolling interest at $180,000. 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 $940,000 as total stockholders’ equity, which is broken down as follows: Common stock ($10 par value) $ 300,000 Additional paid-in capital 430,000 Retained earnings 210,000 Total $ 940,000 View the following as independent situations: a. & b. Marmon sells 10,000 and 2,000 shares of previously unissued common stock to the public for $42 and $22 per share. Albuquerque purchased none of this stock. What journal entry should Albuquerque make to recognize the impact of this stock transaction?

Record the entry to recognize the impact of selling of 10,000 shares.

Record the entry to recognize the impact of selling of 2,000 shares.

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Expert Solution

Before issuing of new shares:

Albuquerque owns 80% interest in Mermon (24000 share of 300,000/10 per share= 24000/30000 = 80%)

Adjusted Fair Value on the date of acquisition = Acquisition price + noncontrolling interest+ (Market value Stockholders equity - Book Value) = $720,000+$180,000+($940,000-$870,000) = $900,000+$70,000 = $970,000

After Issue of new shares: The adjusted acquisition fair value of the subsidiary will increase by:

10,000 * $42 = $420,000

Hence the new value = $970,000+$420,000 = $1,390,000

Albuquerque's ownership will now be: 24000/(30,000+10,000) = 60%

The investments' equity methodd balance before stock issue = 720000+(70000*80%) = $776,000

The book value of underlying investment of Albuquerque = 60% of $1,390,000 = $834,000

Increase in the investmment to be recorded by parent = $834,000-$776,000 = $58,000

Investment in Mermon...........dr $58,000

To Additional Paid in capital $58,000

b. Albuquerque's adjusted acquisition-date fair value prior to issuance of new shares = $970,000

2000 new additional shares issued at the rate of $22 per share = $22*2000 = $44,000

New value after issuance of shares of Mermon = $970000+$44,000 = $1,014,000

New Ownership of Albuquerque = 24000/(30000+2000) = 75%

New Value after issueance of shares of Albuquerque = $1,014,000*75% = $760,500

Decrease in parent's investment to be recorded = $776,000 - $760,500 = $15,500

Additional Paid-in Capital .............dr $15,500

To Investment in Mermon   $15,500


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