On January 1, 2019, Poncho Inc. acquired 75,000 of the 100,000 outstanding common shares of Serape Limited for a
cash consideration of $750,000. On that date, Serape Limited had common shares on its balance sheet with a carrying value of $500,000 and retained earnings of $400,000. The entire acquisition differential was allocated to patents with a remaining useful life on that date of ten years. Poncho Inc. determined the amount of the non-controlling interest in its subsidiary using the fair value enterprise approach, proportionate to the price paid for its controlling interest.
On June 30, 2019, Serape Limited issued an additional 25,000 shares for proceeds of $12.00 per share. Poncho Inc. did not acquire any of this new issue. During 2019, Serape Limited had net income of $120,000 earned evenly over the year and paid dividends of $20,000 at the end of each calendar quarter.
a) What gain or loss will be recognized in the consolidated financial statements of Poncho Inc. and its subsidiary as a result of this transaction?
b) Where in the consolidated statements will the gain or loss be recorded?
c) If Poncho Inc. uses the equity method to account for its investment in Serape Limited, what journal entry, if any will it make to record the new issue by Serape?
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