[vvSPAZvv]

Can someone please explain to me why it would not be c. 95% of Sago’s net income? I figured since it is year 3, we’d just do 95%. Is it because we are accruing to Phillips?

On September 1, Year 1, Phillips, Inc. issued common stock in exchange for 20% of Sago, Inc.’s outstanding common stock. On July 1, Year 3, Phillips issued common stock for an additional 75% of Sago’s outstanding common stock. Sago continues in existence as Phillips’ subsidiary. How much of Sago’s Year 3 net income should be reported as accruing to Phillips?

a. 20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31.

b. All of Sago’s net income.

c. 95% of Sago’s net income.

d. 20% of Sago’s net income to June 30 and all of Sago’s net income from July 1 to December 31.

Explanation

Choice “a” is correct. 20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31.

Rule: In an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition. Therefore, only 20% of Sago net income is included in consolidated earnings until June 30 and 95% thereafter.

FAR - 76! 10/15; (65) 7/15
BEC - 82! 11/15; (74) 8/15
AUD - 01/16
REG - TBA

[Montiel68]

Hey! Here is my logic that question…. Philips in year 1, 2 and part of year 3 (through June 30 yr 3) uses the equity method (20%-50%). Then the company changes to consolidation (20 + 75= 95%, so 95>50%) on July yr 3. So, company will have to restate financials for year 2 as if the company had used the consolidation method in year 2 (the question is not asking this, but you need to keep that in mind). However, you can't say the company used 95% in year 2 because the company at that time only owned 20%. So, you're changing the method NOT the percentage owned.

P.S If I'm wrong, please someone take mercy on us and help us! :s

FAR- Passed
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[vvSPAZvv]

@Montiel Ah, thank you for the moment of clarity. I just realized I interpreted the problem in such an over-analytical way. You are right. It is simple haha

Jan 1 – June 30 Year 3 = 20%

July 1 – Dec 31 Year 3 = 95%

Thanks again!! I feel like I need a dunce cap right now.

FAR - 76! 10/15; (65) 7/15
BEC - 82! 11/15; (74) 8/15
AUD - 01/16
REG - TBA

[Montiel68]

No problem. This helped me as review too 🙂 And I know how you feel, I've had those moments several times in the last few weeks…but hopefully we'll remember these small details on the big day. We can do it!

FAR- Passed
AUD- **F,F,F,** Retake TBD
REG- Passed
BEC- Passed

[Author]

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