On January 1, 2011, a Subsidiary Bought 10% of the Outstanding

question 73

Multiple Choice

On January 1, 2011, 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 2011, 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, 2011?

• A) The investment was recorded for $641,800 at the end of 2011 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 2011 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:

Long-Run Average Usage

The average amount of a resource used over a prolonged period, reflecting consistent consumption patterns.

Dual Cost Allocation

An accounting method that assigns costs to two or more entities or projects, based on a predetermined formula or basis of apportionment.

Variable Costs

Costs that vary directly with the level of production or service delivery, such as materials and labor.

Fixed Costs

Expenses that do not change with the level of production or sales over a certain period, such as rent and salaries.