Question

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $663,000 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 $611,300. Credit balances are indicated by parentheses.

	Adams			Clay
Current assets	$	408,000		$	259,000
Investment in Clay		663,000			0
Equipment		822,300			554,000
Liabilities		(211,000	)		(225,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/17		(1,332,300	)		(438,000	)

In 2017, Clay earns a net income of $50,700 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 $189,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

  

	Adams			Clay
Revenues	$	(572,000	)	$	(382,000	)
Expenses		414,700			286,500
Investment income		Not given			0
Retained earnings, 1/1/18		Not given			(483,700	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		712,000			305,200
Investment in Clay		Not given			0
Equipment		725,800			610,400
Liabilities		(144,700	)		(192,000	)

  

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

Answer :

(a) Acquisition - Date Fair value allocation and annual amortization

Clay's acquisition date fair value	$663,000
Book value
(Assets minus liabilities or stockholders equity	588,000
Fair value in excess of book value	75,000
Allocation to equipment based on		Remaining life	Annual excess Amortization
Fair and book value difference	45,700	5 years	$9,140
Goodwill	$29,300	idefinite	0
Total			$9,140
Equity Method
Investment income 2018
Equity accrual (based on Clay's net income)	$55,700
Amortization (above)	(9,140)
Investment income for 2018	$46,560
Investment in Clay' Dec 31.2018
Consideration transferred for Clay	$663,000
2017 Equity accrual (Based on Clay's net income)	50,700
Excess amortization (above)	(9,140)
Dividends	(5,000)
2018 Equity accrual (Based on Clay's income)	55,700
Excess amortizations	(9,140)
Dividends	(8,000)
Total	$738,120
Initial value method
Investment income 2018
Dividend income	$8,000
Investment in Clay Dec 31.2018
Consideration transferred for Clay	$663,000

(b). The reported consolidated balances are not affected by the parent's investment accounting method.Thus, consolidated expenses ($710,340 or $414,700 + $286,500 + amortization of $9,140) are the same regardless of whether the equity method, the partial value method is applied by Adams

(c). The reported consolidated balances are not affected by the parent's investment in accounting method.Thus, consolidated equipment ($1,363,620 or $725800 + $610,400 + allocation of $45700 - two years of excess depreciation totaling $18,280) is the same regardless of weather the equity method or the initial value method is applied by Adams.

(d). Adams retained earnings - Equity method

Adams retained earnings 1/1/17	$1,332,300
Adams income 2017	189,000
2017 equity accrual for Clay income	50,700
2017 excess amortization	(9,140)
Adams retained earnings 1/1/18	$1,562,860
Adams retained earnings initial value method
Adams retained earnings 1/1/17	$1,332,300
Adams income 2017	189,000
2017 dividend income from Clay	5,000
Adams retained earnings 1/1/18	$1,526,300

(e). Equity method : Entry *C is not utilized since parent's retained earnings balance is correct

Initial value method : Entry *C is needed to recognize increase in subsidiary book value ($50,700 income less 5,000 dividends) and amortization ($9,140) for prior year

Investment in Clay ................36,560

Retained earnings, 1/1/18 (Clay).............. 36,560

(f) Consolidated worksheet entry S for 2015

Common stock (Clay).............. 150,000

Retained earnings 1/1/15 (Clay)..........483,700

Investment in Clay ................................633,700

(g). Consolidated revenues (combined)........................ $954,000

Consolidated expenses (Combined plus excess amortization) .... (710,340)

Consolidated net income ....................................................... $243,660