Question 1

Paron Co intends to acquire a subsidiary on 1 January 20×0 and has shortlisted one of its regular suppliers, Subsea Co, as a potential candidate. Paron has been buying inventory and property, plant, and equipment (PPE) periodically from Subsea for the past two years.

Paron Co has enough cash to acquire all the shares of Subsea Co but is currently undecided on whether to acquire the shares and how many shares to acquire, if any.

If Paron Co acquires all the shares of Subsea Co, Paron Co would pay $420,000 of cash to the existing shareholders of Subsea Co and record an “investment in Subsea Co” for $420,000 and a reduction of cash of $420,000 in its statement of financial position.

Alternatively, if Paron Co acquires 70% of the shares of Subsea Co, Paron would pay cash of $294,000 to the existing shareholders of Subsea Co and record an “investment in Subsea Co” for $294,000 and a reduction of cash of $294,000 in its statement of financial position.