On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock

Question

On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A.

Consolidated stockholders' equity is reduced by $400,000.

B.

Consolidated stockholders' equity is reduced by $320,000.

C.

Included in current assets.

D.

Included in noncurrent assets.

E.

There is no effect on the consolidated balance sheet, because the effects have been eliminated.

A.

Consolidated stockholders' equity is reduced by $400,000.

Explanation / Answer

Consolidated stockholders' equity is reduced by $400,000.

Full Payment of $400,000 is Debited to Treasury Stock

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