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Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the...

Duke Corporation owns a 70 percent equity interest in Salem Company, a subsidiary corporation. During the current year, a portion of this stock is sold to an outside party. Before recording this transaction, Duke adjusts the book value of its investment account. What is the purpose of this adjustment? How would the parent company record this transaction?

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Answer:

Purpose of adjustment:

The purpose of the adjustment of the book value of its investment account is done to measure the company's valuation after liabilities and assets are adjusted, to reflect the market value. This is done to confirm the right value of the investment at the time of sale. The business might be worth more than reported assets and liabilities as it doesnt value intangible assets, discounts etc, so it is a disadvantage of using adjusted book value. Also it does'nt show right profitability of the operating value of company. But still it can be used for finding the potential equity available in a company.

How would the parent company record this transaction?:

Parent would record the sales transaction as unless the control is surrendered, and in the acquisition method, it sights the subsidiary stock sale as a transaction with the owners. In the equity method, variance of the sale proceed and the carrying value of shares sold  is accounted as adjustment to the parent's additional paid in capital. And it represents the excess paid by an investor above the par value of a stock issue. Also, included in the contributed surplus account in the shareholders equity section of balance sheet, even though no gain or loss is recognized.

ekkarill92 answered 2 years ago
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