A parent company owns a 70% interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70% interest in the new shares. Which of the following statements is true?
A) Since the sale was made at the end of the year, the parent's investment account is not affected.
B) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, the parent's investment account must be increased.
C) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, the parent's investment account must be decreased.
D) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, and the parent bought 70% of the shares, the parent's investment account is not affected except for the total acquisition amount for the new shares.
E) None of these answer choices are correct.

Question

Quizplus · Accepted Answer

The parent's investment account is not affected in terms of valuation because the shares were issued at the same valuation basis, but it will increase by the amount paid for the new shares.

A Parent Company Owns a 70% Interest in a Subsidiary