[Lentilcounter]

I have a question with regards to a specific Wiley FAR MCQ. This one has me stumped.

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.

My answer is $17.6M or $16M+$2.5M-$900K.

Wiley says the correct answer also includes the $8M stockholder’s equity of subsidiary + $600K for a total of $26.2M. Isn’t this double-counting? Is there something unique to this multiple choice problem?

Thanks.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Ana]

what's the question for the mcq? I think that part got left out unless my eyes are failing me.

[Lentilcounter]

Assuming that this business combination is appropriately accounted for as a business acquisition, consolidated stockholders’ equity at December 31, year 2, should be

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Ana]

question – why did you think to include the SE and NI of Neel but you think it's double counting if you included Pym's NI?

[Lentilcounter]

Here is the complete answer per Wiley.

“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.”

I'm confused because I thought per “CARINBIG”, you didn't include the stockholder's equity (common stock @ par and APIC components) but just the assets of the sub at FV. In this problem, they are both equal to $8M so I can buy that as part of the answer, I guess. How about the inclusion of the sub's income too? Per “CARINBIG”, you eliminate the sub's RE which is what their incomes closes into it.

Am I making this more difficult than it is?

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Ana]

I think the problem is that you're treating this question to try and calc CARINBIG to account for the acquisition. However, this question is asking for total SE at year end after the acquisition date. Look at F4-45 paragraphs 5.3 and the Pass Key
Maybe I'm over simplifying lol

[Juice23]

1. When Neel purchased Pym, the only thing that would be eliminated at consolidation would be an “Investment in Pym” asset, if there was one. Since this is a 100% stock purchase there will not be an “investment in Pym” asset, the equity will simply become Neel's equity. Pym Equity now is Neel equity–it never becomes an asset–and so it is included at the end of the year.

2. When Neel purchased 100% of Pym, it purchased the right to 100% of Pym's income. So Pym's income no longer closes into Pym's equity, but into the combined entity that is Neel.

[Gary]

The answer says the fair value of the stock issued is 8 million, not the stockholders equity of the company. I think you're confusing those two as they are different. You have to add the amount of stock issued for the net assets of the sub as SE, but you are NOT adding the subsidiary's SE. They just happen to be the same number so I can see how it is tricky. Does that help?

16,000,000 Parents SE
8,000,000 Stock Issuance for Subsidiary
3,100,000 P and S NI
(900,000) dividends
26,200,000 Total SE

AUD 8/18/16
FAR 11/16
BEC 1/17
REG 2/17

[Lentilcounter]

Thank you all.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Lentilcounter]

I have one more for you guys.

Pride, Inc. owns 80% of Simba, Inc.’s outstanding common stock. Simba, in turn, owns 10% of Pride’s outstanding common stock. What percentage of the common stock cash dividends declared by the individual companies should be reported as dividends declared in the consolidated financial statements?

Dividends declared by Pride Dividends declared by Simba
90% 0%
90% 20%
100% 0%
100% 20%

The correct answer is 90% of the dividends declared by Pride and 0% of the dividends declared by Simba.

Why isn't it 20% of the dividends declared by Simba? Don't the dividends get reported in the non-controlling interest? Below is Wiley's explanation.

“from the acquirer’s point of view, acquiree dividends do not represent dividends of the consolidated entity and must be eliminated” – Yes I agree but I thought it was shown in NCI still.

A reciprocal ownership relationship exists between the two companies such that Pride (the acquirer) owns 80% of Simba (the acquiree), and Simba owns 10% of Pride. When Pride declares a cash dividend, 90% of it is distributed to outside parties and 10% goes to Simba. Because Simba is part of the consolidated entity, its 10% share is eliminated; thus, only 90% of dividends declared by Pride are reported in the consolidated statements. When Simba declares a dividend, 80% is distributed to Pride and 20% to outside parties. Pride’s 80% share is eliminated as an intercompany transaction and the remaining 20% is also excluded because, from the acquirer’s point of view, acquiree dividends do not represent dividends of the consolidated entity and must be eliminated.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Author]

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