In order to reduce the risk associated with a new line of business,Conservative Corporation established Spin Company as a wholly owned subsidiary.It transferred assets and accounts payable to Spin in exchange for its common stock.Spin recorded the following entry when the transaction occurred:

-Based on the preceding information,immediately after the transfer,
A)Conservative's total assets decreased by $23,000.
B)Conservative's total assets decreased by $20,000.
C)Conservative's total assets increased by $56,000.
D)Conservative's total assets remained the same.

Question

In order to reduce the risk associated with a new line of business,Conservative Corporation established Spin Company as a wholly owned subsidiary.It transferred assets and accounts payable to Spin in exchange for its common stock.Spin recorded the following entry when the transaction occurred:
 
-Based on the preceding information,immediately after the transfer,
A)Conservative's total assets decreased by $23,000. 
B)Conservative's total assets decreased by $20,000. 
C)Conservative's total assets increased by $56,000. 
D)Conservative's total assets remained the same.

Quizplus · Accepted Answer

The entry recorded by Spin when the transaction occurred shows that assets worth $20,000 were transferred to Spin. This means Conservative Corporation's total assets decreased by $20,000 after the transfer. The accounts payable transferred to Spin did not impact Conservative's total assets since the transfer was offset by the issuance of Spin's common stock. Therefore, options A, C, and D are incorrect.

In Order to Reduce the Risk Associated with a New