Question

Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2017, by issuing 9,400 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 $96,250. However, its equipment (with a five-year remaining life) was undervalued by $6,050 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $38,700, 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	$	(650,000	)	$	(305,000	)
Expenses		462,000			123,000
Investment income		Not given			0
Dividends declared		90,000			90,000

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

	Haynes			Turner
Revenues	$	(752,000	)	$	(376,000	)
Expenses		482,800			153,500
Investment income		Not given			0
Dividends declared		110,000			70,000
Equipment		590,000			382,000

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.

Answer 1

a. Acquisition price (9,400 Shares x $ 15 per share) Book value of Subsidiary Excess of Fair value over book value 141,000 (96,250) 44,750 Allocation of Excess cost to Specified Assets Initial Value as on 01/01/17 [A] 6,050 38,700 44,750 Life [B] Equipment Customer list Total Amortization per year [A/B] 5 1,210 103 ,870 5,080 10 a) Investment in Turner on December 31, 2018 375,340 141,000 182,000 (5,080) Working Notes: Acquisition price paid Add: Equity Income of 2017 Net Income of turner (305,000 - 123,000) 2017 Amortization Less: Dividends declared by Turner 2017 Investment in turner as on 12/31/2017 Add: Equity Income of 2018 Net Income of turner (376,000 - 153,500) 2017 Amortization Less: Dividends declared by Turner 2018 Investment in turner as on 12/31/2018 176,920 (90,000) 227,920 222,500 (5,080) 217,420 (70,000) 375,340

b. Calculation of Consolidated Net Income 486,620 Working Notes: Net Income of Haynes (752,000 - 482,800) Net Income of turner (376,000 - 153,500) Less: Amortizations (above) Consolidated Net Income 2018 269,200 222,500 (5,080) 486,620 C-1 Calculation of Equipment Balance 975,630 Haynes Equipment Balance Turner Equipment Balance Allocation based on fair market value on 01/01/17 Less: Depreciation in 2017 Less: Depreciation in 2018 Consolidated Equipment Balances as on 12/31/18 590,000 382,000 6,050 (1,210) (1,210) 975,630 $ C-2 No, the consolidated balance would not effect by the investment method applied by the parent

d. 90,000 If Initial value method applies Parent records the dividend income instead of equity income Dividend income of 2017 Less: Equity income of 2017 Net Income of turner 2017 Amortization of 2017 Overstated /(Understated) retained earnings , 01/01/18 (Haynes) 182,000 (5,080) (176,920) (86,920) Credit Journal Entry *C Account titles and explanation Investment in Turner Retained earnings, 01/01/18 (Haynes) Debit 86,920 86,920 If Partial Equity Method applies Then parent would failed to record the amortization expenses of $5,080 in 2017. Therefore, Retained Earnings overstated by $ 5,080 Debit Credit Journal Entry *C Account titles and explanation Retained earnings, 01/01/18 (Haynes) Investment in Turner 5,080 5,080 If Equity Method Applies No adjustment entry is required because parent's retained earnings was equal to the consolidated retained earnings