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)	$	300,000
Additional paid-in capital		370,000
Retained earnings		400,000
Total	$	1,070,000

View the following as independent situations:

1. 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. Albuquerque's share in Mormon before issuance of new shares = 90% (27,000 shares out of 30,000 shares)

Adjusted acquisition-date fair value = $1,090,000 [$900,000 + $100,000 + ($1,070,000 - $980,000)]

After the stock issue, the adjusted acquisition-date fair value of the subsidiary will increase by $600,000 (the price of the stock =15,000 * $40) to $1,690,000.

Albuquerque's revised ownership = 60% (27,000 / 45,000)

Investment’s equity method balance before stock issue = $981,000 (900,000 + [$90,000 × 90%])

Book value of Albuquerque' investment now = $1,014,000 (60% of $1,690,000)

Increase recorded = $1,014,000 - $981,000 = $33,000

Journal entry to record the above effect:

Account	Debit	Credit
Investment in Marmon	$33,000
Additional Paid-In Capital		$33,000

b. Adjusted acquisition-date fair value = $1,090,000 [$900,000 + $100,000 + ($1,070,000 - $980,000)]

After the stock issue, the adjusted acquisition-date fair value of the subsidiary will increase by $156,000 (the price of the stock = 6,000 * $26) to $1,246,000.

Albuquerque's revised ownership = 75% (27,000 / 36,000)

Investment’s equity method balance before stock issue = $981,000 (900,000 + [$90,000 × 90%])

Book value of Albuquerque's investment now = $934,500 (75% of $1,246,000)

Increase recorded = $981,000 - $934,500 = $46,500

Journal entry to record the above effect:

Account	Debit	Credit
Additional Paid-In Capital	$46,500
Investment in Marmon		$46,500