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DeMilo, Inc
DeMilo, Inc., owns 100 percent of the 44,000 outstanding shares of Ricardo, Inc. DeMilo currently carries the Investment in Ricardo account at $505,600 using the equity method.
Ricardo issues 6,000 new shares to the public for $15.25 per share. How does this transaction affect the Investment in Ricardo account that appears on DeMilo’s financial records?
Investment in Ricardo should be (decreased/increased) by _____
Expert Solution
Investment in Ricardo Inc by DeMilo Inc = $505,600
Parent’s Ownership Interest = 100%
Fair Value Ownership Equivalency = $505,600
Adjusted Subsidiary Fair Value after New Share Issue = $505,600 + (6,000 * $15.25)
= $505,600 + $91,500
= $597,100
Partner’s Ownership after New Share Issue = 44,000 / 50,000 = 88%
Value of DeMilo Inc. Share after New Share Issue = $597,100 * 88%
= $525,448
Investment in Ricardo should be increased by $19,848 ($525,448 - $505,600).
Therefore, Investment in Ricardo should be increased by $19,848
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