Albuquerque, Inc., acquired 16,000 shares of Marmon Company serveral years ago o

Question

Albuquerque, Inc., acquired 16,000 shares of Marmon Company serveral years ago of for $600,000. At the acquisition date, Marmon reported a book value of $710,000, and Albuquerque assessed the fair value of the noncontrolling interest at $150,000. Any excess of acquisition-date fair value over book value was assigned to broadcast lincensens 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 $800,000 as total stockholders' equity, which is broken down as follows:

800,000

1. Marmon sells 6,000 shares of previously unissued common stock for $40 per share. Albuquerque purchases 2,000 shares and the public purchases 4,000 shares. What is the journal entry(s) that Albuquerque makes to consider this transaction?

2. Marmon sells 6,000 shares of previously unissued common stock for $48 per share. Albuquerque purchases 4,000 shares and the public purchases 2,000 shares. What is the journal entry(s) that Albuquerque makes to consider this transaction?

Common stock ($10 par value) $200,000 Additional paid-in capital 230,000 Retained earnings 370,000 Total

800,000

Explanation / Answer

A) Now, Albuquerque has 16000/20000 I.e. 80% interest in Marion.

Adjusted acquisition fair value = 600000+150000+(20000-16000)*10

= 790000

After stock issuance, adjusted acquisition fair value = 790000+6000*40

= 1030000

Albuquerque ownership = (16000+2000)/(20000+6000) = 69.23%

Equity balance before stock issue = 600000 + 40000*0.8 = 632000

Book value of Albuquerque investment = 1030000*0.6923

= 713077

So, the net increase recorded by Merman = 713077-632000 = 81077

Hence, journal entries:

Investment in Merman = 81077 (Debit)

Additional paid in capital = 81077 (Credit)

B)

Now, Albuquerque has 16000/20000 I.e. 80% interest in Marion.

Adjusted acquisition fair value = 600000+150000+(20000-16000)*10

= 790000

After stock issuance, adjusted acquisition fair value = 790000+6000*48

= 1078000

Albuquerque ownership = (16000+4000)/(20000+6000) = 76.92%

Equity balance before stock issue = 600000 + 40000*0.8 = 632000

Book value of Albuquerque investment = 1078000*0.7692

= 829231

So, the net increase recorded by Merman = 829231-632000 = 197231

Hence, journal entries:

Investment in Merman = 197231 (Debit)

Additional paid in capital = 197231 (Credit)

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