Question

Pippa Corporation agreed to sell all its capital stock to Putney Inc. for four monthly payments of $300,000. After Putney made the first required payment, it ceased making other payments. The stock subscription agreement states that Putney thus forfeits its payments and is entitle to no other future payment. How should Pippa record the $300,000 forfeited payment

Answer 1

Since Putney, Inc., forfeited their stock subscription, then they will lose their stocks and the money they invested in Pippa Corporation.

In this case, Pippa Corp. was being completely acquired by Putney, Inc., and the whole operation went down, then the initial payment must be recorded as additional paid in capital. It should not be included as part of operating income since it wasn't a normal business activity.