Question

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $527,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $448,800. Credit balances are indicated by parentheses.

	Adams			Clay
Current assets	$	394,000		$	267,000
Investment in Clay		527,000			0
Equipment		630,800			396,000
Liabilities		(286,000	)		(199,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/17		(915,800	)		(314,000	)

In 2017, Clay earns a net income of $54,300 and declares and pays a $5,000 cash dividend. In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $172,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

  

	Adams			Clay
Revenues	$	(460,000	)	$	(270,000	)
Expenses		333,500			202,500
Investment income		Not given			0
Retained earnings, 1/1/18		Not given			(363,300	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		695,000			335,700
Investment in Clay		Not given			0
Equipment		511,300			453,900
Liabilities		(226,900	)		(162,700	)

  

1. What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the:

• Equity method.
• Initial value method.

2. How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement?

3. How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet?

4. What is Adams’s January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

• Equity value method.
• Initial value method.

5. What worksheet adjustment to Adams’s January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

6. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

7. What is consolidated net income for 2018?

Answer 1

Adjustment Entry Accounts el Date Debit Credit January 1, 2018 Investment in Cla 38,740 Retained Earnings 01/01/2018, (Adams) 38,740 (to record the adjustment in Retained earning for recording retained earning as per equity method Retained Earning Balance as per Equity method Retained Earning Balance as per Initial Value method Adjustment in Retained Earnings (1,131,540 1,092,800) 1,131,540 1,092,800 38,740 Worksheet Entry to eliminate Clay's stockholders' Equity Date December 31, 2018 Common Stock, Cla Accounts Debit Credit 150,000 363,300 Retained Earnings 01/01/18, Clay Investment in Cla (to eliminate the clay's stockholders' equit 513,300 g) Consolidated Net Income of 2018 Adams Cla Total Revenue 730,000 (333,500)(202,500) (536,000) 194,000 10,560 183,440 460,000 270,000 Expenses Less: Adiustment of Depreciation Expenses on Equipment during the vear 2018 Consolidated Net Income of 2018 Consolidated net incom $ 183,440