I am getting confused with SE in consolidations. In a previous example I asked about (on page 13 of the forum), only the SE of the parent was included. But in this example they are combining the SE of the parent and the sub.
On January 1, year 2, 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, year 2, 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, year 2, exclusive of any consideration of Pym, was $2,500,000. Pym’s net income for the year ended December 31, year 2, was $600,000. During year 2 Neel paid dividends of $900,000. Neel had no business transactions with Pym in year 2.
$26,200,000 is correct. The requirement is to determine the consolidated stockholders’ equity after an acquisition accounted for as an acquisition. Under the acquisition method, the assets and liabilities are brought over at their fair value (ASC Topic 810). Therefore, the increase in stockholders’ equity resulting from the acquisition will be the fair value of the stock issued, or $8,000,000 ($20 x 400,000). The consolidated stockholders’ equity immediately after the business combination is $24,000,000 ($16,000,000 + $8,000,000). Stockholders’ equity is then increased by the consolidated net income of $3,100,000 ($2,500,000 + $600,000) and decreased by the $900,000 of dividends paid. Thus, stockholders’ equity at December 31, year 2, is $26,200,000 ($24,000,000 + $3,100,000 – $900,000). Note that under the purchase method, only the results of operations of the acquired company subsequent to the date of combination is combined with the acquiring company’s results. It is because the combination was entered into January 1, that the entire year’s income of the acquired company is included.
.