Question

On January 1, 2017, Pinnacle Corporation exchanged $3,608,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash	$	159,000			Accounts payable	$	376,000
Accounts receivable		308,000			Long-term debt		2,760,000
Inventory		434,000			Common stock		1,500,000
Buildings (net)		2,000,000			Retained earnings		1,465,000
Licensing agreements		3,200,000
	$	6,101,000				$	6,101,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)					$	3,608,000
Carrying amount acquired						2,965,000
Excess fair value					$	643,000
to buildings (undervalued)	$	266,000
to licensing agreements (overvalued)		(97,000	)			169,000
to goodwill (indefinite life)					$	474,000

At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable included an $85,200 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata.

The separate financial statements for the two companies for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

	Pinnacle				Strata
Sales	$	(7,617,000	)		$	(3,189,000	)
Cost of goods sold		4,725,000				1,770,000
Interest expense		347,000				215,000
Depreciation expense		680,000				368,000
Amortization expense						640,000
Dividend income		(55,000	)
Net income	$	(1,920,000	)		$	(196,000	)
Retained earnings 1/1/18	$	(5,390,000	)		$	(1,791,200	)
Net income		(1,920,000	)			(196,000	)
Dividends declared		400,000				55,000
Retained Earnings 12/31/18	$	(6,910,000	)		$	(1,932,200	)
Cash	$	414,500			$	517,700
Accounts receivable		1,665,000				235,000
Inventory		1,335,000				1,630,000
Investment in Strata		3,608,000
Buildings (net)		5,715,000				2,217,000
Licensing agreements						1,920,000
Goodwill		592,500
Total assets	$	13,330,000			$	6,519,700
Accounts payable	$	(360,000	)		$	(807,500	)
Long-term debt		(3,060,000	)			(2,280,000	)
Common stock		(3,000,000	)			(1,500,000	)
Retained earnings 12/31/18		(6,910,000	)			(1,932,200	)
Total Liabilities and OE	$	(13,330,000	)		$	(6,519,700	)

1. Prepare a worksheet to consolidate the financial information for these two companies.

1. Compute the following amounts that would appear on Pinnacle’s 2018 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.

• Subsidiary income.
• Retained earnings, 1/1/18.
• Investment in Strata.

1. What effect does the parent’s internal investment accounting method have on its consolidated financial statements?

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Part a Strata Adjustments and Eliminations Pinnacle $ $ $ $ $ 26,600 $ 19,400 E $ 55,000 Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net Income Retained earnings 1/1/18 Net income Dividends declared Retained earnings 12/31/18 Cash Accounts receivable Inventory Investment in Strata -7,617,000 $ -3,189,000 4,725,000 $ 1,770,000 347,000 $ 215,000 680,000 $ 368,000 E $ 640,000 -55,000 D -1,920,000 $ - 196,000 -5,390,000 $ -1,791,200 S -1,920,000 $ -196,000 400,000 $ 55,000 -6,910,000 $ -1,932,200 414,500 $ 517,700 1,665,000 $ 235,000 1,335,000 $ 1,630,000 3,608,000 с Consolidated $ -10,806,000 $ 6,495,000 $ 562,000 $ 1,074,600 $ 620,600 $ $ -2,053,800 $ -5,709,000 $ -2,053,800 $ 400,000 $ -7,362,800 $ 932,200 $ 1,814,800 $ 2,965,000 $ $ 1,791,200 $ 319,000 C $ $ $ $ $ Ś $ $ $ $ $ 55,000 D $ 85,200 P $ 319,000 $ $ 3,291,200 S 635,800 A $ Buildings (net) Licensing agreements Goodwill Total Assets 5,715,000 $ 2,217,000 A $ 1,920,000 E 592,500 А 13,330,000 $ 6,519,700 $ $ $ 26,600 E 77,600 A 239,400 $ 19,400 $ 474,000 $ $ $ $ 8,144,800 1,861,800 1,066,500 16,785,100 $ $ $ 85,200 $ $ $ -1,082,300 -5,340,000 -3,000,000 Accounts payable Long-term debt Common stock - Pinnacle Common stock - Strata Retained earnings 12/31/18 Total Liabilities and OE -360,000 $ -807,500 P -3,060,000 $ -2,280,000 -3,000,000 $ -1,500,000 S -6,910,000 $ -1,932,200 -13,330,000 $ -6,519,700 $ $ 1,500,000 $ $ $ $ $ $ $ $ $ -7,362,800 -16,785,100 $ Part b $196,000-($26,600-$19,400) $5,390,000+$319,000 $ 188,800 $ -5,709,000 Subsidiary income Retained earning 1/1/18 Investment in Strata: Initial value basis Conversion to equity as of 1/1/18 Net income for 2018 Dividends for 2018 Equity method balance 12/31/18 $ $ $ $ 3,608,000 319,000 196,000 -55,000 $ 460,000 $ 4,068,000 c. The internal method choice for investment accounting has no effect on consolidated financial statements.