A Parent Company Owns a 90% Interest in a Subsidiary

question 25

Multiple Choice

A parent company owns a 90% interest in a subsidiary at the start of the year and during the year sells a 10% interest to reduce its ownership percentage to 80%.The most popular view of the transaction under current consolidations theory is that

• A)​it is a sale of an investment at a gain or a loss.
• B)​it is likened to a treasury stock transaction that may not result in a gain or a loss.
• C)​it is a transaction between the controlling and non-controlling ownership interests and has no effect on consolidated income.The transaction would impact only paid-in capital.
• D)​the increase or decrease in equity as a result of the sale is an adjustment to donated capital.

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Definitions:

Retained Earnings

The portion of net income not distributed to shareholders but reserved by the company to reinvest in its core business or to pay debt.

Du Pont Identity

A financial analysis framework that breaks down Return on Equity (ROE) into three component parts—profit margin, asset turnover, and financial leverage—providing insights into a company's operational efficiency.

ROE

Return on Equity, an indicator of financial efficiency determined by dividing the net income by the equity of shareholders.