Question

Which of the following is correct? the direct sale of additional shares to the parent company from a subsidiary:_______.

a. decreases the parent's interest and decreases the non-controlling shareholders' interest.
b. decreases the parent's interest and increases the non-controlling shareholders' interest.
c. increases the parent's interest and increases the non-controlling shareholders' interest.
d. increases the parent's interest and decreases the non-controlling shareholders' interest.
Pan Corporation has total stockholders' equity of P 5,000,000 consisting of P 1,000,000 of P 10 par value Common Stock, P1,000,000 of Additional Paid-in Capital, and P 3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation's common stock purchased at book value. Sailor has P 900,000 of 10% cumulative preferred stock outstanding. Pan acquired 60% of the preferred stock of Sailor for P 500,000. After this transaction the balances in Pan's Retained Earnings and Additional Paid-in Capital accounts, respectively, are
a. P 2,960,000.00 and P 1,000,000.00
b. P 3,000,000.00 and P 960,000.00
c. P 3,000,000.00 and P 1,040,000.00
d. P 3,040,000.00 and P 1,000,000.00

Answer 1

The sale of additional shares from a subsidiary to its parent company increases the parent's interest and decreases non-controlling shareholders' interest. For Pan Corporation's financials, after purchasing additional preferred stock, the balance in Retained Earnings and Additional Paid-in Capital accounts would be P 2,960,000.00 and P 1,000,000.00 respectively.

Step-by-step explanation:

The question relates to how the sale of additional shares to the parent company from a subsidiary affects the ownership interest of both the parent company and non-controlling shareholders. The correct answer is that it increases the parent's interest and decreases the non-controlling shareholders' interest (Option d). When a parent company purchases additional shares from a subsidiary, it increases its stake in the subsidiary, thereby diluting the percentage of ownership held by non-controlling shareholders.

Regarding Pan Corporation and Sailor Corporation, Pan's purchase of 60% of the preferred stock of Sailor for P 500,000 would affect its retained earnings but not its Additional Paid-in Capital. The cost of this investment subtracted from Pan's retained earnings results in a new retained earnings balance of P 2,960,000.00 (P 3,000,000.00 - P 500,000 x 60% = P 2,960,000.00) while the Additional Paid-in Capital remains at P 1,000,000.00 (Option a).