Question

Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000.

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.

What adjustment is needed for Webb's investment in Jones account?

Multiple Choice

• $180,000 increase.

• $180,000 decrease.

• $45,000 decrease.

• $45,000 increase.

• No adjustment is necessary.

Answer 1

Answer: $1,80,000 increase.

Explanation:

Jones issues 20,000 new shares of its common stock to outside parties for $10 per share.

i)Jones additional common stock = 20,000 × $10 =$2,00,000.

ii) Jones original Balance = 1,200,000

iii) Total share of common stock = 1,400,000

But, Webb has to maintain 90% ownership in Jones' company .

Web's original share = 1,200,000 × 90% = 1,080,000

New share in jone's company = $1,400,000 × 90% =$1,260,000.

Hence, there will be an increase of $1,80,000 (1,260,000 - 1,080,000)