Final answer:
Point Co.'s accounting treatment of the stock acquisition of Sharpe Corp. involves recording a gain on the revaluation of its initial 10% holding and updating the carrying value of the investment to reflect the fair value on the acquisition date. The total debit to investment would account for the fair value of the initial stake and the cost of acquiring the additional 90% stake.
Step-by-step explanation:
The student's question pertains to the accounting treatment of a stock acquisition where Point Co. purchases a majority stake in Sharpe Corp. Point Co. previously owned 10% of Sharpe and acquired an additional 90% of the voting stock. On the acquisition date, the 10% equity investment had a book value of $340,000 and a fair value of $620,000. To record this transaction, Point Co. would recognize a gain on revaluation of its 10% stake in Sharpe, as the fair value exceeds the book value.
The journal entry to record this transaction on January 1, 20X2 would include a debit to Investment in Sharpe stock for the total investment cost to acquire the 90%, which is $5,580,000, plus the fair value of the 10% stake, which is $620,000, totaling $6,200,000. The credit entries would be one to recognize the gain on revaluation for $280,000 (the difference between fair value and book value of the initial 10% holding) and another to record the cash outflow or bank financing for the additional 90% stake for $5,580,000. Point Co. essentially updates the carrying value of its initial investment to reflect the fair value on the acquisition date and records the additional purchase.