Sun, Inc. is a wholly-owned subsidiary of Patton, Inc. On June 1, Year 1, Patton declared and paid a $1 per share cash dividend to stockholders of record on May 15, Year 1. On May 1, Year 1, Sun bought 10,000 shares of Patton's common stock for $700,000 on the open market, when the book value per share was $30. What amount of gain should Patton report from this transaction in its consolidated income statement for the year ended December 31, Year 1?
a. $410,000
b. $390,000
c. $400,000
d. $0
Explanation
Choice "d" is correct, $0 gain from the purchase of Patton's (parent) stock by Sun (subsidiary). The purchase by the member of a consolidated group of stock of another member of the consolidated group is treated as a treasury stock transaction. This follows the theory of consolidated financial statements presenting one economic entity. (You cannot make money selling stock to yourself.)
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