Problem:
Primetime Corporation owns 2/3 (600,000 shares) of the outstanding $1 par common stock of Satellite company on January 1, 2006. In order to raise cash to finance an expansion program, Satellite issues an additional 100,000 shares of its common stock for $5 per share of January 3, 2006. Satellite's stockholder's equity before and after the new stock issuance is as follows:
Before Issuance After Issuance
Common stock, $1 par 900,000 1,000,000
Additional paid-in-capital 600,000 1,000,000
Retained earnings 600,000 600,000
Total stockholder's equity 2,100,000 2,600,000
Assume that Primetime purchases all 100,000 shares of common stock directly from Satellite.
a. What is Primetime's percentage of ownership interest in Satellite after the purchase?
b. Calculate goodwill from Primetime's acquisition of the 100,000 shares of Satellite.
Assume that the 100,000 shares of common stock are sold to Ivanhoe Company, one of Satellite's non-controlling stockholders.
a. What is Primetime's percentage of ownership interest in Satellite after the new shares are sold to Ivanhoe?
b. Calculate the change in underlying book value of Primetime's investment in Satellite after the sale to Ivanhoe.
c. Prepare the journal entry on Primetime's books to recognize the increase or decrease in underlying book value computed in b above assuming that gain or loss is not recognized.