Question

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $695,600 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 $642,300. Credit balances are indicated by parentheses.

	Adams			Clay
Current assets	$	400,000		$	223,000
Investment in Clay		695,600			0
Equipment		872,300			576,000
Liabilities		(230,000	)		(177,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/17		(1,387,900	)		(472,000	)

In 2017, Clay earns a net income of $76,500 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 $146,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

  

	Adams			Clay
Revenues	$	(400,000	)	$	(380,000	)
Expenses		290,000			285,000
Investment income		Not given			0
Retained earnings, 1/1/18		Not given			(543,500	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		681,000			277,900
Investment in Clay		Not given			0
Equipment		756,300			610,800
Liabilities		(166,700	)		(123,600	)

  

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

a).
Purchase Price Allocation and Amortization Calculation:
Clays acquisition date fair value			695,600
Book Value (assets - liabilities)			622,000
Fair value in excess of book value			73,600
Allocation to equiment based on				Life	Annual Excess Amortizations
			576,000
			642,300
difference between fair and book value			66,300	5	13,260
good will			7,300
total					13,260
Equity Method
Investment Income - 2018
Equity Accrual based on clays income			76500
amortiation			-13260
Investment Income - 2018			63240
Investment in Clay 2017
Consideration transferred for Clay			695,600
2017-
Equity Accrual based on clays income			76,500
Excess Amortizations			(13,260)
Dividends received			(5,000)
2018-
Equity Accrual based on clays income			81,500
Excess Amortizations			(13,260)
Dividends received			(8,000)
total			814,080
Initial Value Method
Investment income 2018
Dividends Income			8,000
Investment in Clay 31 Dec 2018
Consideration tranferred for Clay			695,600
b).
Consolidated Expense:			290,000
			285,000
			13,260
			588,260
The reported consolidated balances are not affected by the parents investment accounting method. So they are the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Adams.
c).
consolidated equipment:
			756,300
			610,800
			71,500
			1,438,600
Depreciation excess of 2yrs			26,520
consolidated equipment =			1,465,120
The reported consolidated balances are not affected by the parents investment accounting method. So they are the same regardless of whether the equity method or the initial value method is applied by Adams.
d).
Adams retained earnings - Equity Method
Adams retained earnings 1/1/17			1,387,900
Adams income 2017			146,000
2017 equity accrual for Clay income			76,500
2017 excess amortization			(13,260)
Adams retained earnings 1/1/18			1,597,140
Adams retained earnings - Initial value method
Adams retained earnings 1/1/17			1,387,900
Adams income 2017			146,000
2017 dividend income from Clay			5,000
Adams retained earnings 1/1/18			1,538,900
e).
EQUITY METHOD	Entry C - Not required as parent's retained earnings balance is correct
INITIAL VALUE METHOD	Entry C - Needed to recognize increase in subsidiary's book value ($76,500 income less 5,000 dividends) and amortization ($13,260) for prior year.
	Entry	Debit	Credit
	Investment in Clay	58240
	Retained Earnings		58240
f).
Consolidated worksheet entry for 2018
Common stock (Clay)			150,000
Retained earnings, 1/1/18 (Clay)			543,500
Investment in Clay			693,500
g).
Consolidated revenues (combined)			780,000
Consolidated expenses (combined plus excess amortization)			588,260
Consolidated net income 2018			1,368,260