On January 1, 2021, a Subsidiary Buys 8% of the Outstanding

question 63

Multiple Choice

On January 1, 2021, a subsidiary buys 8% of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary) , and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2021?

• A) Included in current assets.
• B) Included in noncurrent assets.
• C) Consolidated stockholders' equity is reduced by $350,000.
• D) Consolidated stockholders' equity is reduced by $300,000.
• E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.

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Definitions:

Investment Return

The gain or loss on an investment over a specified period, typically expressed as a percentage of the investment’s initial cost.

Savings Decisions

The process of determining how much money to set aside from current income for future use, often influenced by factors such as interest rates, economic expectations, and personal goals.

Capital Investment

The expenditure on physical assets like buildings, machinery, and equipment intended to increase the capacity or efficiency of a company.

Common Stock

A share of stock is an ownership claim on a firm, entitling its owner to a profit share.