[hhung1485]

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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