Question

On September 30, Year 1, Payne, Inc. exchanged some of its shares for all of the common stock of Salem, Inc. in a business combination. Salem continued as a wholly owned subsidiary of Payne. How should Salem's January 1, Year 1, Retained Earnings and income for January 1 to September 30 be reported in Year 1 consolidated statements?

Answer 1

Payne should exclude Salem's January 1, Year 1, Retained Earnings and income for January 1 to September 30 from consolidated Retained Earnings and consolidated income

Step-by-step explanation:

The Retained Earnings of Salem on January 1, Year 1 and and its income during the period between January 1 and September 30 would not be included in the Year 1 consolidated financial statements.

The reason is that The Retained Earnings of Salem on January 1, Year 1 and and its income during the period between January 1 and September 30 are part of the equity of the shareholders that that Payne acquired on September 30, Year 1. They would then be eliminated in the eliminating entry of the consolidating investment.