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Davis, Incorporated: Variable Interest Entities and Stock Transactions

Davis, Incorporated, acquired 16,000 shares of Maxwell company several years ago. At the present time, Maxwell is reporting $800,000 as total stockholders' equity, which is broken down as follows:

Common Stock ($10 par value) ..............$200,000
Additional paid-in capital..................230,000
Retained earnings...........................370,000
Total...................................$800,000

View the following cases as independent situations:

a) Maxwell issues 5,000 shares of previously unissued common stock to the public for $50 per share. Davis purchased none of this stock. What journal entry should Davis make to recognize the impact of this stock transaction?

b) Maxwell issues 4,000 shares of previously unissued common stock to the public at $25 per share. Davis purchased none of this stock. What journal entry should Davis make to recognize the impact of this stock transaction?

Solution Preview

Please see the attached Excel sheet for a full solution.

First, Davis, Incorporated is a majority owner of Maxwell at 80% ownership, hence Davis uses consolidated financial statements method in reporting its investments in Maxwell.

Requirement a
DR: Investment in Subsidiary ...

Solution Summary

The total stockholders' equity of David, Incorporated is broken down.

$2.19