On January 1, 2011, Pane Corp. exchanged 150,000 shares of its $20 par value common stock for all of Sky Corp.’s common stock. At that date, the fair value of Pane’s common stock issued was equal to the book value of Sky’s net assets. Both corporations continued to operate as separate businesses, maintaining accounting records with years ending December 31. Pane uses the equity method to account for its investment in Sky. Information from separate company operations follows:
Pane Sky Retained earnings—12/31/10 $3,200,000 $925,000 Net income—six months ended 6/30/11 800,000 275,000 Dividends paid—3/25/11 750,000 − What amount of retained earnings would Pane report in its June 30, 2011 consolidated balance sheet? Please provide detailed calculation.
a. $5,200,000
b. $4,450,000
c. $3,525,000
d. $3,250,000
e. $3,380,000