On January 1, 2011, Neel Corp. issued 400,000 additional shares of $10 par value common stock in exchange for all of Pym Corp.'s common stock. Immediately before this business combination, Neel's stockholders' equity was $16,000,000 and Pym's stockholders' equity was $8,000,000.  On January 1, 2011, the fair value of Neel's common stock was $20 per share, and the fair value of Pym's net assets was $8,000,000.  Neel's net income for the year ended December 31, 2011, exclusive of any consideration of Pym, was $2,500,000.  Pym's net income for the year ended December 31, 2011, was $600,000.  During 2011 Neel paid dividends of $900,000.  Neel had no business transactions with Pym in 2011.

Assuming that this business combination is appropriately accounted for as a business acquisition, consolidated stockholders' equity at December 31, 2011, should be

A: $17,600,000
B: $18,200,000
C: $26,200,000
D: $27,100,000

The answer is C. I think the consolidated equity should be parent's equity only, i.e. $17.6k. Please kindly explain why subsidiary's equity is included. Thanks a lot!

If I am not mistaken, the formula is this: parents equity + consideration given (400,000 * $20) + parent's income + sub's net income since purchase (the purchase of sub took place on Jan 1 so the whole year of earnings should be added) - dividends

The sub is fully owned and controlled therefore equity method must be used and not investment method.

chatter,

I don't agree with you. If the sub was purchased and the consolidated financial statements were produced on the same date, in this case Jan 1, the only difference is that the sub's net income would have not been included because there would not be any income earned since the purchase. For that matter parent's income would be zero too because there is no income. So, parent's equity + what was paid - dividends. $16 mill + $8 mill - divs