Question

On January 1, 2018, Strait Corp. purchased 100% of the outstanding common stock of Amarillo Company. On the date of the acquisition, Amarillo’ identifiable net assets had fair values that approximated their recorded book values. The acquisition resulted in no goodwill. Strait Corp. uses the cost method to account for its investment in Amarillo Company.

The following financial statement information is for Amarillo Company for the year ended December 31, 2019:

	2019	2018
Revenues	$100,000	$120,000
Expenses	47,000	65,000
Net income	$53,000	$55,000
Beginning of year retained earnings	$680,000	$650,000
Net income	53,000	55,000
Dividends	-17,000	-25,000
End of year retained earnings	$716,000	$680,000
Cash and receivables	$235,000	$180,000
Property, plant & equipment, net	880,000	800,000
Intangible assets	505,000	450,000
Total assets	$1,620,000	$1,430,000
Current liabilities	$164,000	$60,000
Noncurrent liabilities	400,000	350,000
Common stock	50,000	50,000
Additional paid in capital	290,000	290,000
Retained earnings	716,000	680,000
Total liabilities and stockholder’s equity	$1,620,000	$1,430,000

27. What is the balance in the Equity Investment account in Strait Corp.’s pre-consolidation balance sheet on December 31, 2019?

a. $   990,000

b. $1,020,000

c . $1,056,000

d.   $1,370,000

28. For this question only, assume that Amarillo’ identifiable net assets had fair values that approximated their recorded book values, except for equipment which had fair value that was $50,000 higher than the book value and had a remaining useful life of 10 years. The acquisition also resulted in $125,000 of goodwill.

What is the amount of the [ADJ] entry necessary to prepare the consolidated financial statements for the year ended December 31, 2019?

a. $ 25,000

b. $ 30,000

c. $ 36,000

d. $ 98,000

Answer 1

As the Strait Corp. has acquired 100% of the outstanding common stock of Amarillo Company, so the Total of net Assets has to be taken as the Value of Investments in the Books of Strait Corp.

Calculation of Net Assets :-

Total Assets for the Year ended 2018                           1430,000.00

Less Liabilities:-

          Current Liabilities                                                    60,000.00

          Non Current Liabilities                               350,000.00

          Net Assets                                                  1020,000.00

So the Balance in Equity Investment Account in Strait Corp.’s pre-consolidation Balance Sheet is $1,020,000.00. i.e., option c is the correct choice for us.

Part – 2

In the Equity Investment Account, for computing the Value of Investment, the amount earned as profits by the Investee is added to the Value of Investment and the Amount paid as Dividend is reduced from the Value of Investment. The Net proportion amount equivalent to Investment percentage is considered in the Books of Investor.

The Net Profits Earned during the Year   =          53,000.00

Less:- Dividends distributed                 = 17,000.00

Value to be adjusted in Investment A/c   =          36,000.00

As the percentage of Investment is 100% so we shall increase the value of Investments by $36,000.00.

So again our answer is option c.