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.

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Definitions:

Lowballing

A phenomenon in which after agreeing to an offer, people find it hard to break that commitment even if they later learn of some extra cost to the deal.

Implicit Pressure

An unspoken or indirect force that influences individuals to act or think in a certain way, often stemming from societal or cultural expectations.

Minority Opinions

Views or beliefs held by a small segment of a community or group, which can differ significantly from the majority consensus.

Informational Influence

The effect of information or knowledge from others on an individual's attitudes, opinions, or behaviors.