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 $36.00 per share.

	Michael Company 12/31/18				Aaron Company 12/31/18
Revenues	$	(742,000	)		$	(406,500	)
Cost of goods sold		336,000				158,250
Amortization expense		133,200				93,000
Dividend income		(5,000	)			0
Net income	$	(277,800	)		$	(155,250	)
Retained earnings, 1/1/18	$	(926,000	)		$	(797,000	)
Net income (above)		(277,800	)			(155,250	)
Dividends declared		90,000				5,000
Retained earnings, 12/31/18	$	(1,113,800	)		$	(947,250	)
Cash	$	149,000			$	16,400
Receivables		457,000				295,000
Inventory		657,000				371,000
Investment in Aaron Company		720,000				0
Copyrights		522,000				388,000
Royalty agreements		982,000				448,000
Total assets	$	3,487,000			$	1,518,400
Liabilities	$	(1,273,200	)		$	(441,150	)
Preferred stock		(300,000	)			0
Common stock		(500,000	)			(100,000	)
Additional paid-in capital		(300,000	)			(30,000	)
Retained earnings, 12/31/18		(1,113,800	)			(947,250	)
Total liabilities and equity	$	(3,487,000	)		$	(1,518,400	)

On the date of acquisition, Aaron reported retained earnings of $480,000 and a total book value of $610,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period.

1. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2018.

2. b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements?

Answer 1

Consolidation worksheet
Consolidated Profit & Loss A/c
	Michael Company	Aaron Company	Consolidation
	12/31/18	12/31/18
Revenues	742000	406500	1148500
Cost of goods sold	336000	158250	494250
Amortisation expense	133200	104000	237200
Net Income	272800	144250	417050
Dividends declared	90000		90000
Net income after dividends declared	182800	144250	327050
Consolidated Balance sheet
Cash	149000	16400	165400
Receivables	457000	295000	752000
Inventory	657000	371000	1028000
Copyrights	522000	438000	960000
Royalty agreements	982000	508000	1490000
Goodwill	351250		351250
Total assets	2767000	1628400	4395400
Liabilities	1273200	441150	1714350
Common stock	500000		500000
Preferred stock	300000		300000
Additional paid in capital	300000		300000
Retained earnings	1113800		1113800
Calculation of Goodwill/depreciation reserve
Value of the investment in Aaron	720000
Cost of equity	130000
Retained earnings	941250
Goodwill	351250