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Parker owned all of Odom Inc.Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share.On January 1, 2011, Odom issued 3,000 new shares to the public for $70 per share.How does this transaction affect the Investment in Odom Inc. account?a) It should be decreased by $141,120.b) It should be increased by $176,400.c) It should be increased by $48,000.d) It should be decreased by $128,400.e) It is not affected since the shares were sold to outside parties.

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hoangkhangpham94

Answer:

The answer is d) It should be decreased by $128,400

Explanation:

We have the Total stock holder's equity of Odom is:

Book value of 12,000 outstanding shares + Value of 3,000 newly issued shares = 12,000 x 56 + 3,000 x 70 = $882,000

% of holding Parker has in Odom after the new issuance = 12,000 / (12,000+3,000) = 80%

=> Investment in Odom account balance should be recorded at: 80% x Total stock holder's equity of Odom = 0.8 x 882,000 = $705,600

=> Investment in Odom account should be written down by 705,600 - 834,000 = $(128,400).

So d is the correct choice.

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