Question

Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2017, by issuing 11,700 shares of $10 par value common stock. Haynes’s shares had a $15 per share fair value. On that date, Turner reported a net book value of $134,050. However, its equipment (with a five-year remaining life) was undervalued by $7,550 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $33,900, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years.

The following balances come from the individual accounting records of these two companies as of December 31, 2017:

	Haynes			Turner
Revenues	$	(730,000	)	$	(240,000	)
Expenses		493,000			125,000
Investment income		Not given			0
Dividends declared		120,000			50,000

The following balances come from the individual accounting records of these two companies as of December 31, 2018:

	Haynes			Turner
Revenues	$	(913,000	)	$	(310,000	)
Expenses		519,300			162,100
Investment income		Not given			0
Dividends declared		140,000			30,000
Equipment		572,000			383,000

1. a. What balance does Haynes’s Investment in Turner account show on December 31, 2018, when the equity method is applied?

2. b. What is the consolidated net income for the year ending December 31, 2018?

3. c-1. What is the consolidated equipment balance as of December 31, 2018?

4. c-2. Would this answer be affected by the investment method applied by the parent?

5. d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.

Complete this question by entering your answers in the tabs below.

• Req A to C2
• Req D

a. What balance does Haynes’s Investment in Turner account show on December 31, 2018, when the equity method is applied?

b. What is the consolidated net income for the year ending December 31, 2018?

c-1. What is the consolidated equipment balance as of December 31, 2018?

c-2. Would this answer be affected by the investment method applied by the parent?

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	a. Investment in Turner account b. Consolidated net income c-1. Consolidated equipment c-2. Would this answer be affected by the investment method applied by the parent?

Consolidation Worksheet Entries

Note: Enter debits before credits.

	Date Accounts Debit Credit December 31, 2018

Answer 1

Answers:

a.	Investment in Turner account	348,600
b.	Consolidated net income	536,700
c-1.	Consolidated equipment	959,530
c-2.	Would this answer be affected by the investment method applied by the parent?	No

d.

Initial value method

Date	Accounts	Debit	Credit
31-Dec-18	Investment in Turner	60,100
	Retained earnings 1/1/18 (Haynes)		60,100

Partial Equity Method

Date	Accounts	Debit	Credit
31-Dec-18	Retained earnings, 1/1/18 (Haynes)	4900
	Investment in Turner		4900

Equity Method

No adjustment entry required.

Calculation

a.

An allocation of the acquisition price based on the fair value of the shares issued need to be made first.

Acquisition fair value (consideration paid by Haynes 11,700*15)	175,500
Book value	134,050
Excess of Turner fair value over book value	41,450

Excess fair value assigned to specific accounts based on fair value		Life	Annual Excess Amortizations
Equipment	7,550	5	1,510
Customer List	33,900	10	3,390
			4,900

Acquisition fair value	175,500
2017 Income accrual	115,000
2017 Dividends declared by Turner	(50,000)
2017 Amortizations	(4,900)
2018 Income accrual	147,900
2018 Dividends declared by Turner	(30,000)
2018 Amortizations	(4,900)
Investment in Turner account balance 12/31/18	348,600

b.

Calculation:

Net income of Haynes	393,700
Net Income of Turner	147,900
Depreciation expense	(1,510)
Amortization expense	(3,390)
Consolidated Net income 2018	536,700

c - 1.

Calculation:

Equipment balance Haynes	572,000
Equipment balance Turner	383,000
Allocation based on fair value	7,550
Depreciation for 2017-2018	(3,020)
Consolidated equipment December 31, 2018	959,530

c - 2.

Explanation: No, Investment method applied by parent has no effect on Consolidated equipment totals. Investment method applied by parent affects only the parent company's internal reporting.

d.

Calculation:

Initial value method

If the initial value method was applied in 2017, then the parent would have recorded dividend income of 50,000 rather than 115,000 as equity income. Hence income is understated by 65,000. Also amortization expense = $4,900 was not recorded. So the 2018 beginning retained earnings is understated by 60,100 (65,000 - 4,900).

Worksheet Entry *C hence adjust the parent's beginning retained earning to an accrual basis. The entry will be :

Investment in Turner	60,100
Retained earnings 1/1/18 (Haynes)		60,100

Partial Equity Method

If the partial equity method was applied in 2017, the parent would failed to record amortization expense of 4,900. The retained earnings is overstated by 4,900.

This is adusted with Entry *C

Retained earnings, 1/1/18 (Haynes)	4900
Investment in Turner		4900

Equity Method

If the equity method was applied in 2017, consolidated retained earnings will equal to retained earnings of parent company.

So, no adjustment *C entry is required.