Question

Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances Indicated by parentheses). Michael acquired all of Aaron's outstanding voting stock on January 1, 2014, by Issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company's stock actively traded at $32.50 per share. Revenues Cost of goods sold Amortization expense Dividend income Net income Retained earnings, 1/1/18 Net income (above) Dividends declared Retained earnings, 12/31/18 Cash Receivables Inventory Investment in Aaron Company Copyrights Royalty agreements Total assets Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings, 12/31/18 Total liabilities and equity Michael Company 12/31/18 $ (689,500) 309,750 119,700 5,000) $ (265,050) $(1,002,000) (265,050) 90,000 $(1,177,050) 192,000 447,000 642,000 650,000 545,000 1,001,000 $ 3,477,000 $(1,199,950) (300,000) (500,000) (300,000) 177, 050) $ (3,477,000) Aaron Company 12/31/18 $ (418,500) 164,250 101,500 0 $ (152,750) $ (730,000) (152,750) 5,000 $ (877,750) 19, 100 231,000 365,000 387,000 416,000 $ 1,418,100 $ (410,350) (100,000) (30,000) (877,750) $(1,418,100)

Answer 1

Part A

Aaron fair value (stock exchanged at fair value) (20000*32.50)	650000
Book value of subsidiary	540000
Excess fair value over book value	110000
Excess assigned to specific accounts based on fair values
		Life	Annual Excess Amortizations
Royalty agreements	60000	6 yrs.	10000
Trademark	50000	10 yrs.	5000
Total			15000

Aaron' retained earnings January 1, 2018	730000
Retained earnings at date of purchase	(410000)
Increase since date of purchase	320000
Excess amortization expenses ($15,000 x 4 years)	(60000)
Conversion to equity method for years prior to 2018 (Entry *C)	$260000

MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2018
				Consolidation Entries	Consolidated Totals
Accounts	Michael	Aaron		Debit		Credit
Revenues	(689500)	(418500)					(1108000)
Cost of goods sold	309750	164250					474000
Amortization expense	119700	101500		15000			236200
Dividend income	(5000)	0		5000			0
Net income	(265050)	(152750)					(397800)
Retained earnings 1/1	(1002000)	(730000)		730000		260000	(1262000)
Net income (above)	(265050)	(152750)					(397800)
Dividends paid	90000	5000				5000	90000
Retained earnings 12/31	(1177050)	(877750)					(1569800)
Cash	192000	19100					211100
Receivables	447000	231000					678000
Inventory	642000	365000					1007000
Investment in Aaron Co.	650000			260000		910000	0
Copyrights	545000	387000					932000
Royalty agreements	1001000	416000		20000		10000	1427000
Trademark				30000		5000	25000
Total assets	3477000	1418100					4280100
Liabilities	(1199950)	(410350)					(1610300)
Preferred stock	(300000)	0					(300000)
Common stock	(500000)	(100000)		100000			(500000)
Additional paid-in capital	(300000)	(30000)		30000			(300000)
Retained earnings 12/31	(1177050)	(877750)					(1569800)
Total liabilities and equity	(3477000)	(1418100)		1190000		1190000	(4280100)

Part B

Due to equity method, Equity in Earnings of Aaron, Retained Earnings—1/1/18, and Investment in Aaron Co will be different.

Equity in Earnings of Aaron (152750-15000)	$137750
Retained Earnings, 1/1/18 (1002000+60000)	$1062000
Investment in Aaron (650000+260000+(152750-15000-5000))	$1042750

In equity in earnings of Aaron, parent would accrue 100% of Aaron's $152750 income minus $15,000 in amortization expense.