Utah Company holds 80% of the stock of a subsidiary company.The subsidiary issues 100 additional shares of stock to Utah Company at a price above book value per share.The subsidiary does not issue any additional shares at the same time.How will Utah Company record the purchase?
A)Utah Company records a gain on sale of stock.
B)Utah Company increases additional paid-in capital.
C)Utah Company decreases additional paid-in capital.
D)Utah Company assigns any excess cost over book value acquired to increase undervalued identifiable assets or goodwill as appropriate.

Question

Quizplus · Accepted Answer

When a parent company purchases additional shares in its subsidiary at a price above book value, a portion of the purchase price is assigned to increase the value of the subsidiary's undervalued identifiable assets or goodwill. This allocation process is necessary in order to properly reflect the true economic value of the subsidiary and is known as the "purchase price allocation." Therefore, Utah Company will assign any excess cost over book value acquired to increase undervalued identifiable assets or goodwill as appropriate.

Utah Company Holds 80% of the Stock of a Subsidiary