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?


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.


Your math sounds like frigging sorcery so I made an example.

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

Why do we do so Magician?

Why do we do this Magician?Why we exclude equity of acquired company?

While preparing consolidated financials, intra group transactions are cancelled. Your investment in the acquired company are cancelled against the equity of the acq entity

Oh ok… Curriculum is not mentining this…Or maybe I have missed it.

No, u have not… Curriculum does not mention this … ur ques was pertaining to fin accounting and curriculum is teaching us fin analysis.