Question

Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2017, by issuing 9,000 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 $100,000. However, its equipment (with a five-year remaining life) was undervalued by $5,000 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $30,000, 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	$	(600,000	)	$	(230,000	)
Expenses		440,000			120,000
Investment income		Not given			0
Dividends declared		80,000			50,000

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

	Haynes			Turner
Revenues	$	(700,000	)	$	(280,000	)
Expenses		460,000			150,000
Investment income		Not given			0
Dividends declared		90,000			40,000
Equipment		500,000			300,000

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

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

3. 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.

Answer 1

Answer:

c-1.	Consolidated equipment balance	803,000
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	56,000
	Retained earnings 1/1/18 (Haynes)		56,000

Partial Equity Method

Date	Accounts	Debit	Credit
31-Dec-18	Retained earnings, 1/1/18 (Haynes)	4000
	Investment in Turner		4000

Equity Method

No adjustment entry is necessary.

Calculation:

c-1.

Equipment balance Haynes	500,000
Equipment balance Turner	300,000
Allocation based on fair value	5000
Depreciation for 2017-2018	-2000
Consolidated equipment December 31, 2018	803,000

c-2.

Explanation: No, Investment method applied by the parent company has zero effect on Consolidated equipment totals. Investment method applied by parent company only affects 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 110,000 as equity income. Hence income is understated by 60,000. Also amortization expense = $4,000 was not recorded. So the 2018 beginning retained earnings is understated by 56,000 (60,000 - 4,000).

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

Investment in Turner	56,000
Retained earnings 1/1/18 (Haynes)		56,000

Partial Equity Method

If the partial equity method was applied in 2017, then the parent company will fail to record amortization expense of $4,000. The retained earnings is overstated by $4,000.

So it is adusted with Entry *C. The entry is:

Retained earnings, 1/1/18 (Haynes)	4,000
Investment in Turner		4,000

Equity Method

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

So, no adjustment *C entry is necessary.