Question

Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $476,100 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 $459,300. Credit balances are indicated by parentheses.

	Adams			Clay
Current assets	$	460,000		$	226,000
Investment in Clay		476,100			0
Equipment		651,300			408,000
Liabilities		(270,000	)		(220,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/20		(967,400	)		(264,000	)

In 2020, Clay earns a net income of $52,500 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $130,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:

  

	Adams			Clay
Revenues	$	(556,000	)	$	(354,000	)
Expenses		403,100			265,500
Investment income		Not given			0
Retained earnings, 1/1/21		Not given			(311,500	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		798,000			289,300
Investment in Clay		Not given			0
Equipment		522,800			441,900
Liabilities		(207,900	)		(163,000	)

  

1. What are the December 31, 2021, Investment Income and Investment in Clay account balances assuming Adams uses the:

• Equity method.
• Initial value method.

1. What is the amount of Consolidated Expenses in its December 31, 2021, consolidated income statement under each of the following methods?

2. What is the amount of Consolidated Equipment in its December 31, 2021, consolidated balance sheet under each of the following methods?

3. What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

• Equity value method.
• Initial value method.

1. What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

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

3. What is consolidated net income for 2021?

Answer 1

Since we only upto 4 subparts, we will answer first 4 subparts.

4,76,100 1,50,000 2,64,000 Consideration paid by Adams Less: Book value of Clay Common stock Retained Earnings, 1/1/20 Book value of clay Excess of Fair value over book value Allocation of excess Value Equipment (Fair value-Book value) Remaining excess value allocated to Goodwill -4,14,000 62,100 (459,300-408,000) (62,100-51,300) 51,300 10,800 Depreciation of Excess value allocated to Equipment and Goodwill Amount Life in years Assets Equipment Goodwill Depreciation per year (Amount/Life) 5 10,260 51,300 10,800 NA Equity method Investment in Clay as on 1/1/20 Add: Net Income of Clay in 2020 Less: Depreciation expense in 2020 Less: Dividend received in 2020 Balance as on 1/1/2021 Add: Net Income of Clay in 2021(354,000 -265500) Less: Depreciation expense in 2021 Less: Dividend received in 2021 Balance as on 31/12/2021 4,76,100 52,500 -10,260 -5,000 5,13,340 88,500 -10,260 -8,000 5,83,580 Investment Income 2021 Net Income of Clay in 2021 Less: Depreciation expense in 2021 Investment in Income in 2021 88,500 -10,260 78,240

Initial value method Under initial value method the investment in clay will not changes So, Investment balance as on 12/31/2021 Investment in Income Dividend received from Clay 4,76, 100 8,000 a Equity Method Initial value method Investment Income Investment in Clay 78,240 5,83,580 8,000 4,76,100 b Consolidated expenses Under all the methods expenses and equipment calculation will remain same Expenses of Adams 4,03, 100 Expenses of Clay 2,65,500 Total expenses 6,68,600 Add: Depreciation of Equipment during the year 2021 10,260 Consolidated expenses 6,78,860 Consolidated Equipment value as on 12/31/2021 Equipment value as on 12/31/2021 Adams Clay Add: Excess value acquired as on 01/01/2020 Less: Depreciation of excess value during 2020 Less: Depreciation of excess value during 2021 Consolidated Equipment value as on 12/312 5,22,800 4,41,900 9,64,700 51,300 -10,260 -10,260 9,95,480

d Calculation of Retained Earnings as on 01/01/2021 Equity Method Retained Earnings of Adams as on 1/1/2020 Add: Net Income of Adams Add: Net Income of Clay Less: depreciation expense Consolidated Retained earnings as on 1112 9,67,400 1,30,000 52,500 -10,260 11.39.640 Initial Value method Retained Earnings of Adams as on 1/1/2020 Add: Net Income of Clay Add: Dividend Income received from Clay Consolidated Retained earnings as on 1112 9,67,400 52,500 5,000 10.24.900 Equity Method Initial Value method Partial Equity Method b Consolidated C. Consolidated d. Expenses Equipment Retained 6,78,860 9,95,480 11,39,640 6,78,860 9,95,480 10,24,900 6,78,860 9,95,480

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