Question

Adams inc acquires clay $542,800. Need help with a-g.

Problem 3-22 (LO 3-3a, 3-3b, 3-4) Adams, Inc., acquires Clay Corporation on January 1, 2017 in exchange for $542.800 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 $501,300. Credit balances are indicated by parentheses. S clay $285,000 Current assets Investment in Clay Equipment Liabilities Common stock Retained earnings, 1/1/17 Adams 362,000 542,800 705,300 (243,000) (350,000) (1,017,100) 444,000 (251, 000) (150,000) (328,000) In 2017 Clay earns a net income of $59,700 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 $144,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows: Revenues Expenses Investment income Retained earnings, 1/1/18 Dividends declared Common stock Current assets Investment in Clay Equipment Liabilities Adams clay S(404,000) S(252,000) 292,900 189,000 Not given Not given (382,700) 8,000 (350,000) (150,000) 648,000 343,500 Not given 598, 800 480, 600 (179.100) (204.500) < Prev 15 of 32 !! Next >

Answer 1

Part A

Clay’s acquisition-date fair value	542800
Book value (assets minus liabilities or stockholders' equity) (285000+444000-251000)	(478000)
Fair value in excess of book value	64800
Allocation to equipment based on		Remaining life	Annual excess amortizations
Equipment fair and book value difference (501300-444000)	57300	5 yrs.	11460
Goodwill	7500	indefinite	0
			11460

EQUITY METHOD

Investment Income—2018:
Equity accrual (based on Clay's net income) (252000-189000)	63000
Amortization	(11460)
Investment income for 2018	51540
Investment in Clay—December 31, 2018:
Consideration transferred for Clay	542800
2017:
Equity accrual (based on Clay's net Income)	55000
Excess amortizations	(11460)
Dividends	(5000)
2018:
Equity accrual (based on Clay's net Income)	63000
Excess amortizations	(11460)
Dividends	(8000)
Total	$624880

INITIAL VALUE METHOD

Investment Income—2018:
Dividend income	$8000

Investment Income—2018:
Consideration transferred for Clay	542800

Part B, C and D

	b. consolidated expenses	c. consolidated equipment	d. retained earnings
Equity method	$493360	1112980	$1209340
Initial value method	$493360	1112980	$1166100
Parity equity method	$493360	1112980

Consolidated expenses = $292,900 + $189,000 + $11460 (amortization) = $493360 remains same in all accounting methods.

Consolidated equipment = $598,000 + $480,600 + $57,300 (allocation) – $22,920 (two years deprecation) = $1112980

Adams retained earnings—Equity method
Adams retained earnings—1/1/17	1017100
Adams income 2017	144000
2014 equity accrual for Clay income	59700
2014 excess amortization	(11460)
Adams retained earnings—1/1/17	$1209340

Adams retained earnings— Initial value method
Adams retained earnings—1/1/17	1017100
Adams income 2017	144000
2014 dividend income from Clay	5000
Adams retained earnings—1/1/18	$1166100

Part E and F

Event	General Journal	Debit	Credit
1 (Entry *C)	Investment in Clay (59700-5000-11460)	43240
	Retained earnings, 1/1/18 (parent)		43240
	(to record retained earnings if Adams accounts for its investment in Clay under the initial value method)
2 (Entry S)	Common stock (Clay)	150000
	Retained earnings, 1/1/18 (Clay)	382700
	Investment in Clay		532700
	(to eliminate stockholders’ equity accounts of subsidiary)

Part G

Consolidated revenues (combined)	656000
Consolidated expenses (combined plus excess amortization)	(493360)
Consolidated net income	$162640