A parent company owns a controlling interest in a subsidiary and on the last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. The adjusted subsidiary value at the date of the new stock issuance was $27 per share. 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 more than the adjusted subsidiary value per share, the parent's investment account must be increased.
C) Since the shares were sold for more than the adjusted subsidiary value per share, the parent's investment account must be decreased.
D) Since the shares were sold for more than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent's investment account is not affected.
E) None of these answer choices are correct.

Question

Quizplus · Accepted Answer

The parent's investment account must be increased because the shares were sold at a price higher than the adjusted subsidiary value, resulting in an increase in the subsidiary's equity value.

A Parent Company Owns a Controlling Interest in a Subsidiary