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 Topic: business combination ( Topic Closed)
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blueberry028
Newbie
Joined: 18 May 2016
Location: United States
Online Status: Offline
Posts: 5
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| Posted: 17 Jun 2016 at 16:10 | IP Logged
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On June 30, Year 1, Pane Corp. exchanged 150,000
shares of its $20 par value common stock for all of
Sky Corp.'s common stock. At that date, the fair value
of Pane's common stock issued was equal to the book
value of Sky's net assets. Both corporations continued
to operate as separate businesses, maintaining
accounting records with years ending December 31.
Information from separate company operations follows:
Pane Sky
Retained earnings - 12/31/Year 0 $ 3,200,000
$ 925,000
Net income - six months ended 6/30/Year 1
800,000 275,000
Dividends paid - 3/25/Year 1 750,000 −
If the business combination is accounted for as an
acquisition, what amount of retained earnings would
Pane report, in its June 30, Year 1, consolidated
balance sheet?
a.
$5,200,000
b.
$3,525,000
c.
$4,450,000
d.
$3,250,000
Correct answer is d.
I chose answer b because I included the net income
from the subsidiary.
Is the reason we don"t include the 275k of sub's Net
Income because the question stated "Both corporations
continued to 'operate as separate businesses" or is it
because
Net Income is closed to retained earnings at date of
acquisition and we write off sub's equity on
acquisition?
When i went through the lectures; I remember write off
sub's equity but not sub's net income.
For some reason I thought that Net Income is closed to
retained earning at 12/31 and question is asking 6/30
so I included the net income? (<--- not sure about
this one.)
May some give me a explanation?
I would really appreciate it. My mind is fried from
all this far review.
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nambivar
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Joined: 14 Nov 2010
Location: United States
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Posts: 144
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| Posted: 18 Jun 2016 at 22:01 | IP Logged
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blueberry028 We note the following: first, the consolidated net income [NI] includes the subsidiary's NI from the date of acquisition because the parent Pane owns 100% of the subsidiary Sky;
secondly, the consolidated retained earnings [RE] on the date of acquisition is only the RE of the parent [3200000]; thirdly, the dividends [750000]paid by the parent Pane during the period go to reduce the consolidated RE; hence we arrive at consolidated RE at June as follows: RE at the date of acquisition: 3,200,000 + parent's NI for the period 800,000- dividends paid during the period 750,000 = 3,250,000.
Hope this helps.==
Passed all papers in 2011
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blueberry028
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Joined: 18 May 2016
Location: United States
Online Status: Offline
Posts: 5
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| Posted: 19 Jun 2016 at 17:52 | IP Logged
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I see ,thank you so much, nambivar, this time I totally
understand.
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