Question

When a subsidiary company issues additional shares of its own common stock to outside third parties, the parent will need to decrease its investment account if the per-share price received for the additional shares issued is ___________ than the time-adjusted per-share acquisition-date subsidiary fair value.

a. Greater
b. Equal
c. Lesser
d. Unspecified

Answer 1

The parent company must decrease its investment account when a subsidiary issues new shares at a price lesser than the value at which the parent acquired its shares, reflecting ownership dilution.

Step-by-step explanation:

When a subsidiary company issues additional shares of its own common stock to outside third parties, the parent will need to decrease its investment account if the per-share price received for the additional shares issued is lesser than the time-adjusted per-share acquisition-date subsidiary fair value.

This adjustment is necessary to reflect the dilution of the parent’s ownership interest in the subsidiary due to the issuance of new shares at a lower price. If the shares are sold at a higher price, it usually suggests a capital gain for the existing shareholders, which doesn't require a decrease in the investment account of the parent company.