Problem:
Prince Corporation purchased 960,000 shares of Smithtown Corporation's common stock (an 80% interest) for 21,200,000 on January 1, 2006. The 2,000,000 excess of investment cost over book value acquired was allocated to goodwill
On January 1, 2008, Smithtown sold 400,000 previously unissued shares of common stock to the public for 30 per share. Smithtown's stockholder's equity on January 1, 2006, when Prince acquired its interest, and on January 1, 2008 immediately before and after the issuance of additional shares, was as follows
January 1, 2008 January 1, 2008
January 1, 2006 Before Issuance After Issuance
Common stock, $10 par 12,000 12,000 16,000
Other paid-in- capital 4,000 4,000 12,000
Retained earnings 8,000 10,000 10,000
Total 24,000 26,000 38,000
Calculate the balance of Prince's investment in Smithtown account on January 1, 2008 before the additional stock issuance
Determine Prince's percentage interest in Smithtown on January 1, 2008 immediately after the additional stock issuance
Prepare a journal entry on Prince's books to adjust for the additional share issuance on January 1, 2008 if gain or loss is not recognized
Prepare a journal entry on Prince's books to adjust for the additional share issuance on January 1, 2008 if the issuance is treated as a sale and gain or loss is recognized (as permitted by the SEC)