Shares of Common Stock Problem

[Joystar1977]

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 issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-incapital of the parent company?

Can somebody explain to me how to work this problem out? I am having a real hard time trying to figure it out.

 

[Nora]

You need to study the EQUITY method and learn what it means. Increase of the subsidiary company's book value also increases the parent company's book value. But do check the effects of the equity method.

 

[Nora]

In general, the parent company's additional paid in capital would increase when it sells its own shares. What happens when a subsidiary company sells shares, thereby increasing the subsidiary company's additional paid in capital? You need to study the equity method more to see the effects of such transactions on the parent company.