Question

On January 1, 2020, Dallas Enterprises acquired 1,000 shares of P5 par value ordinary shares, along with 250 shares of P25 par value preference shares, of Ford Company in a single transaction for P52,000. Currently, Ford Company’s ordinary shares and preference shares are trading for P35 per share and P84 per share respectively. On January 2, Dallas should allocate the cost of the investment in Ford’s ordinary and preference Sl shares as follows:

Ordinary shares ? Preference shares?

Answer 1

Shares acquired are to be recorded at the cost amount at which they are acquired. If the shares are acquired at a lump sum amount then the amount should be bifurcated in the ratio of number of shares acquired by the company.

Total amount paid = P52,000

Total shares = 1,000 + 250 = 1,250

Therefore amount to be allocated between ordinary shares and preference shares

Ordinary shares

= 52,000*1,000/1,250

= P41,600

Preferrence shares

= 52,000*250/1,250

= P10,400.