The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent's percentage interest in the subsidiary. The parent company's share of the subsidiary's net assets will increase if the shares are purchased:
A) at a price equal to book value.
B) at a price below book value.
C) at a price above book value.
D) will not show an increase.

Question

Quizplus · Accepted Answer

When a subsidiary purchases its own shares from noncontrolling stockholders at a price below book value, the parent company's percentage interest in the subsidiary increases without the parent investing additional funds. This results in an increase in the parent's share of the subsidiary's net assets because the book value of the equity decreases while the parent's ownership percentage increases, effectively increasing the parent's share of the net assets at a cost lower than the proportional book value of the shares acquired.

The Purchase by a Subsidiary of Some of Its Shares