A Parent Company Owns a Controlling Interest in a Subsidiary

question 92

Multiple Choice

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 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 more than book value, the parent's investment account must be increased.
• C) Since the shares were sold for more than book value, the parent's investment account must be decreased.
• D) Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected.
• E) None of these.

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Definitions:

Cooperate

To work jointly towards a common goal or towards completing a task.

Compete

To take part in a contest or rivalry with the objective of winning or achieving dominance over others.

Tragedy of the Commons

A concept illustrating how individual users acting independently according to their own self-interest can ultimately deplete or spoil a shared limited resource, despite it being in no one's long term interest.

Social Trap

Situations where individuals or groups engage in behaviors that are beneficial in the short term but detrimental in the long term, often leading to collective negative outcomes.