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Multiple-Choice Questions on Recording Business Combinations

5. On June 30, 20X2, Pane Corporation exchanged 150,000 shares of its $20 par value common stock
for all of Sky Corporation'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, Dec. 31, 20X1 $3,200,000 $925,000
Net income, 6 months ended June 30, 20X2 800,000 275,000
Dividends paid, March 25, 20X2 750,000 ?

What amount of retained earnings would Pane report in its June 30, 20X2, consolidated balance
a. $5,200,000.
b. $4,450,000.
c. $3,525,000.
d. $3,250,000.

6. A and B Companies have been operating separately for five years. Each company has a minimal
amount of liabilities and a simple capital structure consisting solely of voting common stock. A Company,
in exchange for 40 percent of its voting stock, acquires 80 percent of the common stock of
B Company. This was a "tax-free" stock-for-stock (type B) exchange for tax purposes. B Company
assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair
market value of the A stock used in the exchange was $700,000. The goodwill on this acquisition
would be:
a. Zero.
b. $60,000.
c. $120,000.
d. $236,000.

Solution Preview

5. Since Pane has all shares of Sky, it will consolidate based on equity method
Retained earnings at the Dec 31, 20X1=3200000+925000=4125000
Retained earnings for the period 1 Jan 20X2 to 30 June 20X2=800000-750000+275000=325000
Retained earnings as on 30 June ...

Solution Summary

This solution shows step-by-step calculations to determine the correct answer for the recording business combination questions.