Parker owned all of Odom Inc.Although the Investment in Odom Inc.account had a balance of $834,000,the subsidiary's 12,000 shares had an underlying book value of only $56 per share.On January 1,2010,Odom issued 3,000 new shares to the public for $70 per share.How does this transaction affect the Investment in Odom Inc.account?

Question

Quizplus · Accepted Answer

The Investment in Odom Inc. account should be decreased by the amount of the new shares issued to the public, which is calculated as follows:

3,000 shares x $70 per share = $210,000

Since Parker owns all of Odom Inc., the decrease in the Investment in Odom Inc. account should be based on the underlying book value per share, which is $56 per share.

Therefore, the Investment in Odom Inc. account should be decreased by:

3,000 shares x $56 per share = $168,000

So the net effect on the Investment in Odom Inc. account is:

$834,000 - $210,000 - $168,000 = $456,000

This represents the new underlying book value of the subsidiary, based on the issuance of new shares at a higher price than the original book value.

Therefore, the Investment in Odom Inc. account should be decreased by $128,400 (choice D) to reflect the issuance of new shares at a higher price than the underlying book value.

Parker Owned All of Odom Inc