A parent company owns a controlling 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 entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. 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 less than book value, the parent's investment account must be increased.
C) Since the shares were sold for less than book value, the parent's investment account must be decreased.
D) Since the shares were sold for less than book value but the parent did not buy any of the shares, the parent's investment account is not affected.
E) None of the above.

Question

Quizplus · Accepted Answer

Since the subsidiary issued new shares entirely to outside parties at $25 per share, the market value of the subsidiary's shares decreased. This decrease in market value results in a lower value of the parent's investment, which is recorded in the parent's investment account. Therefore, the parent's investment account must be decreased to reflect the change in market value.

A Parent Company Owns a Controlling Interest in a Subsidiary