Question

DeMilo, Inc., owns 100 percent of the 40,000 outstanding shares of Ricardo, Inc. DeMilo currently carries the Investment in Ricardo account at $490,000 using the equity method. Ricardo issues 10,000 new shares to the public for $15.75 per share. How does this transaction affect the Investment in Ricardo account that appears on DeMilo’s financial records?

Answer 1

Answer:

$28,000

Explanation:

The transaction that affects the Investment in Ricardo's account that appears on DeMilo’s financial records can be calculated by deducting Investment in Ricardo Inc by DeMilo Inc from the value of DeMilion Inc. Share after New Share Issue.

DATA

Investment in Ricardo Inc by DeMilo Inc = $490,000

Parent’s Ownership Interest = 100%

Fair Value Ownership Equivalency = $490,000

Calculation

Adjusted Subsidiary Fair Value after New Share Issue = $490,000 + (10,000 * $15.75)

Adjusted Subsidiary Fair Value after New Share Issue = $490,000 + $157,500

Adjusted Subsidiary Fair Value after New Share Issue = $647,500

Partner’s Ownership after New Share Issue = 40,000 / 50,000 = 80%

Value of DeMilion Inc. Share after New Share Issue = $647,500 * 80%

Value of DeMilion Inc. Share after New Share Issue = $518,000

Therefore, Investment in Ricardo should be increased by $28,000 ($518,000 - $490,000).