# 14.5 Retained earnings vanishing during an acquisition

In the first pic, you see retained earnings for the acquirer (12K) and the target company (4K)

The acquirer pays 8,000 to get an 80% interest in the target company. So retained earning should sum up, at least partially, right? How come the retained earnings on the new balance sheet is still only \$12K?

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You don’t add in any of the subsidiary’s equity: no preferred stock, no common stock, no additional paid-in capital, no retained earnings.

Simplify the complicated side; don't complify the simplicated side.

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Let’s say the the acquirer has

Assets: 10M (for the sake of simplicity we say it’s all cash too)

Liabilities: 6M

Equity: 4M

Let’s say the target company is

Assets: 9M

Liabilities: 6M

Equity: 3M

Let’s say that the acquirer buys out 100% of the company for 3.5M cash

New Assets = 10M + 9M - 3.5M for the acquisition = 15.5M

New Liabilities = 6M+6M = 12M

New Equity = 4M+0 (since you told me not to add any equity from the target) = 4M

Logically, Assets = Liabilities + Equity, so this has to be 15.5M-12M = 3.5M, so I’m not getting where the difference is.

In your example you paid 3.5 million for net assets worth 3 million (= 9 million – 6 million).  That extra 0.5 million has to be allocated either to identifiable assets or to goodwill.  Either way, the new assets are:

10 million + 9 million – 3.5 million + 0.5 million = 16 million

Simplify the complicated side; don't complify the simplicated side.

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Why do we do so Magician?

S2000magician wrote:

You don’t add in any of the subsidiary’s equity: no preferred stock, no common stock, no additional paid-in capital, no retained earnings.