On January 1, 2011, Stamford reacquires 8,000 of the outstanding shares of its own common stock for $24 per share. None of these shares belonged to Neill. How does this transaction affect the parent company’s Additional Paid-In Capital account?
a. Has no effect on it.
b. Decreases it by $55,000.
c. Decreases it by $35,000.
d. Decreases it by $28,000.
Neill Company purchases 80 percent of the common stock of Stamford Company on January 1, 2010, when Stamford has the following stockholders’ equity accounts:
Common stock—40,000 shares outstanding . . . . . . . . . . . . . . . . . . $100,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Retained earnings, 1/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $715,000
To acquire this interest in Stamford, Neill pays a total of $592,000. The acquisition-date fair value of the 20 percent noncontrolling interest was $148,000. Any excess fair value was allocated to goodwill, which has not experienced any impairment.
On January 1, 2011, Stamford reports retained earnings of $620,000. Neill has accrued the increase in Stamford’s retained earnings through application of the equity method.