A Parent Company Owns a Controlling Interest in a Subsidiary

question 51

Multiple Choice

A parent company owns a controlling interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

• A) Since the sale was made at the end of the year, the parent's investment account is not affected.
• B) Since the shares were sold for less than the adjusted subsidiary value per share, the parent's investment account must be increased.
• C) Since the shares were sold for less than the adjusted subsidiary value per share, the parent's investment account must be decreased.
• D) Since the shares were sold for less than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent's investment account is not affected.
• E) None of these answer choices are correct.

Comprehend the concept of debits and credits and their impact on account balances.

Recognize the structure and significance of T accounts in accounting.

Understand how various types of transactions (cash receipts, cash payments, revenues, expenses) are recorded.

Identify the components and purposes of accounts found in the chart of accounts.

---

Definitions:

Purchase

The act of buying goods or services, which can include raw materials, equipment, or any item required for business operations.

Overapplied Overhead

Occurs when the allocated manufacturing overhead costs are more than the actual overhead costs incurred.

Cost of Goods Sold

The immediate expenses related to the manufacturing of products that a company sells.

Work in Process Inventory

Work in process inventory includes goods partially completed in the production process, sitting between raw materials and finished goods.