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 $33 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 more than book value, the parent's investment account must be increased.
C) Since the shares were sold for more than book value, the parent's investment account must be decreased.
D) Since the shares were sold for more 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, the parent's investment account will not be affected by the issuance of the new shares. However, since the new shares were issued at a price higher than the book value per share, the value of the subsidiary has increased. Therefore, the parent's investment account must also be increased to reflect the increase in the value of the investment.

A Parent Company Owns a Controlling Interest in a Subsidiary