Question

Herbert, Inc. acquired all of Rambis Company’s outstanding stock on January 1, 2017 for $ 574,000 in cash. Annual excess amortization of $ 12,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $ 400,000, and Rambis reported a $ 200,000 balance. Herbert reported internal income of $ 40,000 in 2017 and $ 50,000 in 2018 and paid $ 10,000 in dividends each year. Rambis reported net income of $ 20,000 in 2017 and $ 30,000 in 2018 and paid $ 5,000 in dividends each year. Assume that Herbert’s internal income figures above do not include any income from the subsidiary. The parent uses the equity method.

A. What is the amount reported as consolidated Retained Earnings on December 31, 2017?

B. What is the amount reported as consolidated Retained Earnings on December 31, 2018?

C. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2017 when the parent uses the equity method?

D. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2018 when the parent uses the equity method?

2017 journal entries for Herbert Inc. To record the acquistion transaction Investment in Rambis Company Cash 1/1/17 To record receipt of dividend 12/31/17 Cash Investment in Rambis Company To accrue the subsidiary income 12/31/17 Investment in Rambis Company Equity in Subsidiary Earnings To recognize amortization on allocations 12/31/17 Equity in Subsidiary Earnings Investment in Rambis Company Investment in Rambis Equity in Subsidiary Earnings Herbert's Internal Income Add: Equity in Investee Income Net Income Retained Earnings 1/1/17 Add: Net Income Less: Dividends Paid Retained Earnings 12/31/17 Note: Since the equity method is used, Herbert's net income and retained earnings includes the accrual for the subsidiary's 1 of 3

Answer 1

2017 Consolidated Retained Earnings (+) (t) o RE balance as on 01/0117 Net Income during 2017 Dividend received in 2017 Dividend paid 400,000 & 40,000 $ 5,000 $ (10,000$) RE balance as on 31/12/2017 435,000 $ 2018 Consolidated Retained Earnings RE balance as on all01/2018 W Net Income during 2018 HD Dividend received in 2018 Dividend paid in 2018 435,000 $ 50,000$ 5,000 $ (10,000 $2 RE balance as 480,000$ on 31/12/2018 Scanned with CamScanner

2017 Investment in Rambis balance Opening balance on oil01|2012 574,000$ 2018 Investment in Rambis balance - Opening balance as on 0110117 o Amortization paid annually (+) Income from subsidiary 6) Dividend paid 574,000$ (12,000) $20,000$ (5,000$) Balance as on all 01/ 2018 577,000 $ Hos Scanned with CamScanner