Question

The total amount of equity (common stock, additional paid-in capital and retained earnings) that should appear on the balance sheet of the combined companies immediately following the merger should be

Answer 1

Equal to the sum of their net assets (whether or not the assets are revalued)

Step-by-step explanation:

Mathematically, equity equals the total asset of a company, less its total liabilities. This is also referred to the net assets of the company.

`Equity = Total Assets - Total Liabilities`

However, when two companies are merging, the total assets of the combining companies are usually revalued to reflect their current values and not the historical values usually carried in the books before the merger. In a revaluation, if the value of total assets increases, a corresponding increase will be recorded in Equity (revaluation surplus). This keeps the Equity-Net Assets equation equal at all times.

Thus, when two companies merge, the total amount of equity of the combined companies will equal the net assets of the combined companies, irrespective of whether a revaluation of the assets of the companies was done or not.