Question on Layout Hierarchy

Salutations,

Here is the situtation:
Under DEFAULT I created a layout named SPACE, configured and changed its design. After that, under SPACE layout I created another layout named PAGE, configured and changed its design. I applied the SPACE layout in my TestSpace (Take note that my TestSpace has child pages and its child pages has child child pages).

Here are my questions?

1. When I applied the SPACE layout in my TestSpace, why is it that all of the pages (including all the child pages) in TestSpace inherits the SPACE layout? What happened to my PAGE layout?
2. How does inheriting/behavior of layouts work when its applied in a SPACE?

Thanks in advance.