Question

How are the accounts of investor and investee companies affected when the investor acquires stock from stockholders of the investee (eg. a New York Stock Exchange purchase)? Does this differ if the investee acquires previously unissued stock directly from the investor?

Answer 1

Solution:

* Finding the effect on investor and investee company accounts:

# When an investor acquires stock from existing shareholders of the investee, then only the investor’s accounts are affected.

# The investor records this investment in its books at the cost value.

# Since the Investee is not a party to the transaction, therefore, its accounts are not affected.

# Both investee and investor accounts would be affected if unissued stock were acquired from the investee company directly.

# The investor records its investment at the cost value and the investee company adjust its owner’s equity and assets to reveal the issuance of formerly unissued stock.