A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70 percent 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 book value, the parent's investment account must be increased.
C) Since the shares were sold for book value, the parent's investment account must be decreased.
D) Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares.
E) None of the above.

Question

Quizplus · Accepted Answer

Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares. The parent company already owned a 70 percent interest in the subsidiary, so the acquisition of additional shares would not affect the original investment amount held by the parent. The book value is only relevant for the value of the shares, not the transaction itself. Therefore, the parent's investment account would be adjusted for the cost of the new shares only.

A Parent Company Owns a 70 Percent Interest in a Subsidiary