On September 1, Year 1, Phillips, Inc. issued common stock in exchange for 20% of Sago, Inc.'s outstanding common stock. On July 1, Year 3, Phillips issued common stock for an additional 75% of Sago's outstanding common stock. Sago continues in existence as Phillips' subsidiary. How much of Sago's Year 3 net income should be reported as accruing to Phillips?
a. 20% of Sago's net income to June 30 and 95% of Sago's net income from July 1 to December 31.
b. 95% of Sago's net income.
c. 20% of Sago's net income to June 30 and all of Sago's net income from July 1 to December 31.
d. All of Sago's net income.
Explanation
Choice "a" is correct. 20% of Sago's net income to June 30 and 95% of Sago's net income from July 1 to December 31.
Rule: In an acquisition, the net income of a newly acquired subsidiary will only be included in consolidated net income from the date of acquisition. Therefore, only 20% of Sago net income is included in consolidated earnings until June 30 and 95% thereafter.
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