If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and the parent company acquires 60% of the subsidiary's preference shares at a cost of $150,000, how much will the amount of cash on the consolidated balance sheet change as a result of this transaction?

A) It will not change.
B) It will increase by $150,000.
C) It will decrease by $144,000.
D) It will decrease by $150,000.

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Byron Massey · Accepted Answer

Final Answer : D, Explanation :  When the parent company acquires 60% of the subsidiary's preference shares, the amount of shareholders' equity allocated to the subsidiary's preference shares decreases by 60% of $240,000, which is $144,000. This decrease in equity results in a decrease in the amount of cash on the consolidated balance sheet, which is equal to the cost of acquiring the shares. Therefore, the amount of cash will decrease by $150,000.

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