These questions are based on the following information and should be viewed as independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2009, when Cocker had the following stockholders' equity accounts.
Common Stock- 40,000 shares outstanding= $140,000
Additional paid-in capital = $105,000
Retained earnings = $476,000
Total stockholders' equity = $721,000
To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2012. On January 1, 2012 Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.
On January 1, 2012, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?
A. $0
B. Decrease it by $32,900
C. Decrease it by $45,700
D. Decrease it by $49,400
E. Decrease it by $50,500
To determine the effect of the transaction on the additional paid-in capital of the parent company, we need to calculate the total amount paid to reacquire the 8,000 shares and compare it to the additional paid-in capital of the parent company.
The total amount paid to reacquire the 8,000 shares is calculated as follows:
8,000 shares * $34 per share = $272,000
Therefore, the total amount paid to reacquire the shares is $272,000.
To determine the effect on the additional paid-in capital of the parent company, we need to analyze the ownership percentages before and after the transaction.
Before the transaction, Popper Co. held 80% of the common stock of Cocker Co. Assuming there were no changes in the number of outstanding shares, Popper Co. owned 40,000 shares * 80% = 32,000 shares of Cocker Co.
After Cocker Co. reacquired 8,000 shares of its own common stock, the number of outstanding shares reduced to 40,000 shares - 8,000 shares = 32,000 shares.
Since none of the reacquired shares belonged to Popper Co., their ownership percentage remains the same at 80%. Therefore, Popper Co. still owns 32,000 shares out of the 32,000 outstanding shares.
To determine the effect on the additional paid-in capital, we need to calculate the proportionate reduction in the additional paid-in capital based on the percentage of shares owned by the parent company.
The reduction in additional paid-in capital is calculated as follows:
Percentage of shares owned by the parent company * Total amount paid to reacquire shares
80% (0.80) * $272,000 = $217,600
Therefore, the transaction would have decreased the additional paid-in capital of the parent company by $217,600.
The correct answer is not provided among the options given.
To determine how the transaction would have affected the additional paid-in capital of the parent company, we need to understand the accounting treatment for the repurchase of the common stock by Cocker.
When a company repurchases its own stock, the additional paid-in capital is reduced by the amount paid to repurchase the shares. This reduction reflects the return of capital to the shareholders.
In this case, Cocker reacquired 8,000 shares of its own common stock for $34 per share. Therefore, the total amount paid to repurchase the shares is $34 x 8,000 = $272,000.
Based on this information, we can conclude that the additional paid-in capital of the parent company (Popper) would decrease by the amount paid to repurchase the shares, which is $272,000.
Therefore, the answer is not provided in the options provided.