On January 1,2009,a Subsidiary Bought 10% of the Outstanding Shares

question 89

Multiple Choice

On January 1,2009,a subsidiary bought 10% of the outstanding shares of its parent company.Although the total book value and fair value of the parent's net assets were $5.5 million,the consideration transferred for these shares was $590,000.During 2009,the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000.How were these shares reported at December 31,2009?

• A)The investment was recorded for $641,800 at the end of 2009 and then eliminated for consolidation purposes.
• B)Consolidated stockholders' equity was reduced by $641,800.
• C)The investment was recorded for $590,000 at the end of 2009 and then eliminated for consolidation purposes.
• D)Consolidated stockholders' equity was reduced by $639,800.
• E)Consolidated stockholders' equity was reduced by $590,000.

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Definitions:

Common Stock

Equity securities representing ownership in a corporation, giving holders voting rights and a share in the company’s profits through dividends.

Trial Balance

An accounting report that lists the balances of all ledgers accounts to check the mathematical accuracy of the bookkeeping system.

Debit Balance

Refers to the excess of debits over credits in an account, indicating either an increase in assets or expenses or a decrease in liabilities, equity, or income.

Debits

Entries that are made on the left side of an account, representing an increase in assets or expense accounts or a decrease in liability, equity, or revenue accounts.