Question

Discuss the impact on the parent's investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders?

Answer 1

When the shares are purchased ratably by non-controlling shareholders and parent, the stock owned percentage by the non-controlling stockholders and parent after the new issuance would remain unchanged as their respective interests prior to the new issuance. When shares are entirely purchased by the non-controlling shareholders, the percentage of ownership of the parent's will be reduced. Therefore the transaction's economic substance would be the sale of interest by parent. But book value of the interest of parent's in the subsidiary may rise, fall, or remain the same depending on the relationship of the issuance price to book value per share of stock. When price exceeds the book value the interest of parent will increase. When the book value exceeds the price, the parent's interest decreases