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 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?

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

 

[Nora]

When Cocker Co purchases its own shares (known as treasury stock), additional paid in capital decreases. If the balance in additional paid in capital is not enough, then retained earnings also decreases by the balance. Since Popper Co owns 80% of Cocker Co (a substantial ownership) and is using the equity method, the decrease in equity of Cocker Co also affects a decrease in the total equity of the parent company. That's my understanding of the question but you need to study the equity method well. Do changes in equity of the subsidiary company affect the paid in capital section of the parent company? That's the question you need to find the answer to.

 

[Joystar1977]

Nora: There is no where in the question when I have tried numerous ways to figure out this problem where it says it decreases. For example, you mentioned the fact of when Cocker Co. purchases its own shares, additional paid in capital decreases, Balance in additional paid in capital is not enough then retained earnings decreases by the balance, Popper Co. owns 80% of Cocker Co where there is a decrease in the equity of Cocker Co., and also affects a decrease in the total equity of the parent company.

From what I have read it states to figure out the common stock that is outstanding, Record the par value of all common stock outstanding and Divide it by the Par value per share or common stock. After this, I would come up with the number of shares common stock outstanding. It states that the treasury stock would be subtracted from total shares, but only when they are present.

The answers to this problem offered doesn't say anywhere about the decrease or gitve it an option. The options given are as follows:

A. Increase it by $28,700

B. Increase it by $16,800

C. $0

D. Increase it by $280,000

E. Increase it by $593,600

 

[kirby]

Accounting problems like this serve to teach a lesson on focusing on your goal vs an actual accounting issue. The actual question, surrounded by lots of misdirection, is: what is the effect on Popper's paid in capital in 2012. Paid in capital of Popper changes only if Popper issues or retires its own shares at a price different than par. Popper never does this in 2012. So answer C is a winner.