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DeMilo, Inc., owns 100 percent of the 44,000 outstanding shares of Ricardo, Inc. DeMilo currently carries...

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 _____

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Answer #1

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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