The parent company's retained earnings are reduced when additional paid-in capital is insufficient to absorb an excess of purchase price over book value of the subsidiary's preferred stock.

Question

Quizplus · Accepted Answer

When a company acquires a subsidiary, it may pay a price that is higher than the book value of the acquired company's preferred stock. If the excess cannot be absorbed by additional paid-in capital, it must be deducted from the parent company's retained earnings. This reduces the amount of earnings available for distribution to shareholders. Therefore, the statement is true.

The Parent Company's Retained Earnings Are Reduced When Additional Paid-In