Question

In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Cash and receivables 23,000
Inventory 15,000
Land 30,000
Buildings 100,000
Equipment 95,000
Accounts Payable 20,000
Accum Depr—Buildings 32,000
Accum Depr—Equip 30,000
Common Stock 56,000
Additional Paid-In Capital 125,000

Based on the preceding information, immediately after the transfer,
A) Conservative's total assets decreased by $23,000.
B) Conservative's total assets decreased by $20,000.
C) Conservative's total assets increased by $56,000.
D) Conservative's total assets remained the same.

Answer 1

Conservative Corporation's total assets remained the same after creating and transferring assets to a wholly owned subsidiary, Spin Company, as the transfer was replaced by equivalent common stock and additional paid-in capital.

Step-by-step explanation:

When looking at the scenario where Conservative Corporation created a subsidiary called Spin Company, it's important to analyze how the transaction affects the parent company's balance sheet. Conservative Corporation transferred assets and accounts payable to Spin Company in exchange for common stock.

Spin Company recorded assets totaling $263,000 (Cash and receivables of $23,000, Inventory of $15,000, Land of $30,000, Buildings of $100,000, and Equipment of $95,000) and the offsetting entries of liabilities and equity, which includes the Accounts Payable of $20,000, Accumulated Depreciation on Buildings of $32,000, Accumulated Depreciation on Equipment of $30,000, Common Stock ledger entry of $56,000 and Additional Paid-In Capital of $125,000. Therefore, the correct answer is that Conservative's total assets remained the same immediately after the transfer, because the assets removed from Conservative Corporation's balance sheet have been replaced with the equivalent value of equity in Spin Company, namely the Common Stock and Additional Paid-In Capital that Conservative Corporation now holds in Spin. No gain or loss on this inter-company transaction should be recognized on the exchange according to generally accepted accounting principles, as this is an internal restructuring move.