A parent company owns a controlling 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 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 the adjusted subsidiary value per share, the parent's investment account must be increased.
C) Since the shares were sold for less than the adjusted subsidiary value per share, the parent's investment account must be decreased.
D) Since the shares were sold for less 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

When a subsidiary issues new shares at a price lower than the parent's valuation basis, it dilutes the parent's ownership percentage and decreases the parent's investment account.

A Parent Company Owns a Controlling Interest in a Subsidiary