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 these.

Question

Quizplus · Accepted Answer

Since the shares were sold at a price lower than book value, it means the subsidiary's assets are being undervalued. Therefore, the parent company would have to decrease the investment account to reflect this decrease in the subsidiary's value.

A Parent Company Owns a Controlling Interest in a Subsidiary