REFERENCE: Ref.02_05
Carnes has the following account balances as of May 1,2000 before a pooling of interests transaction takes place. The fair value of Carnes' Land and Buildings are $650,000 and $550,000,respectively.On May 1,2000,Riley Company issues 30,000 shares of its $10 par value ($25 fair value)common stock in exchange for all of the shares of Carnes' common stock.
-Assume Riley issues 70,000 shares instead of 30,000 at date of acquisition.Riley currently has $40,000 of additional paid-in capital on its books.By how much will Riley's retained earnings increase or decrease as a result of the combination?

Question

REFERENCE: Ref.02_05
Carnes has the following account balances as of May 1,2000 before a pooling of interests transaction takes place.  The fair value of Carnes' Land and Buildings are $650,000 and $550,000,respectively.On May 1,2000,Riley Company issues 30,000 shares of its $10 par value ($25 fair value)common stock in exchange for all of the shares of Carnes' common stock.
-Assume Riley issues 70,000 shares instead of 30,000 at date of acquisition.Riley currently has $40,000 of additional paid-in capital on its books.By how much will Riley's retained earnings increase or decrease as a result of the combination?

Quizplus · Accepted Answer

The pooling of interests method combines the financial statements of two companies as if they have always been one company. Thus, the fair value of Carnes' assets will not be revalued in the books of Riley. 
Since Riley issues 70,000 shares instead of 30,000, the total par value of the issued shares is $700,000. The excess of the fair value of the shares issued over the par value is $25-$10 = $15 per share, which results in an additional paid-in capital of $15 x 70,000 = $1,050,000. 
Since there are no other changes to the retained earnings of both companies, the increase in the combined retained earnings of Riley after the combination is equal to the sum of the individual retained earnings of both companies before the combination. Thus, the increase in Riley's retained earnings is:

Carnes' retained earnings + Additional paid-in capital - Par value of Riley's shares issued 
= $420,000 + $40,000 - (70,000 x $10) 
= $140,000

REFERENCE: Ref.02_05 Carnes Has the Following Account Balances as of May 1,2000