Question

Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.'s common stock on December 31, year 1. On that date, the stockholders' equity of Subsidiary was $150,000, consisting of $100,000 of no-par common stock and $50,000 of retained earnings. On January 2, year 2, Subsidiary issued 2,000 previously unissued shares for $24,000 to various outside investors. As a consequence of this transaction, Parent's ownership share was reduced to 75%. Which of the following correctly reports this transaction?

a. Parent's investment in Subsidiary is reduced by $4,500.
b. Parent's investment in Subsidiary is increased by $3,000.
c. The consolidated income statement reports a loss of $7,500.
d. The consolidated income statement reports a gain of $4,000.

Answer 1

Answer:

a) Parent's investment in the Subsidiary is reduced by $4,500.

Explanation:

The computation is shown below:

The balance in investment prior to the sale of securities is

= $150,000 × 90%

= $135,000

Now The balance in investment after to the sale of securities is

= (($150,000 + 24,000) × 75%)

= $130,500

Therefore Decrease in investment in Subsidiary is

= $135,000 - $130,500

= $4,500

Hence, the correct option is A.