Question

Herbert, Inc., acquired all of Rambis Company's outstanding stock on January 1, 2020. for $631,000 in cash. Annual excess amortization of $14,100 results from this transaction. On the date of the takeover. Herbert reported retained earnings of $415,000, and Rambis reported a $258,000 balance. Herbert reported internal net income of $45,750 in 2020 and $58.450 in 2021 and declared $10,000 in dividends each year. Rambis reported net income of $23.500 in 2020 and $36.200 in 2021 and declared $5.000 in dividends each year. a. Assume that Herbert's internal net income figures above do not include any income from the subsidiary. If the parent uses the equity method, what is the amount reported as consolidated retained earnings on December 31, 2021? What would be the amount of consolidated retained earnings on December 31, 2021, if the parent had applied either the initial value or partial equity method for internal accounting purposes? b. Under each of the following situations, what is the Investment in Rambis account balance on Herbert's books on January 1, 2021? • The parent uses the equity method. • The parent uses the partial equity method. • The parent uses the initial value method. c. Under each of the following situations, what is Entry *C on a 2021 consolidation worksheet? • The parent uses the equity method. The parent uses the partial equity method. The parent uses the initial value method.

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Answer 1

Herbert, Inc. Requirement a Requirement 415000 45750 -10000 Debit in $ Credit in $ Herbert (parent) Balance - 1/1/20 Herbert Income - 2020 Herbert Dividends - 2020 (subsidiary dividends are intra entity and thus eliminated) Rambis Income - 2020 (not included in parent's income) Amortisation - 2020 Herbert Income 2021 Herbert Dividends - 2021 Rambis Income - 2021 Amortisation - 2021 Consolidated Retained Earnings ,31.12.2021 Journal Enteries Trans Particulars 1 No Journal Entry No entry is needed to convert the past figures to the equity method since that method has already been applied. 23500 -14100 58450 - 10000 36200 -14100 530700 2 14100 14100 Partial equity method Consolidated RE are the same regardless of the method in use the beginning balance plus the income less the dividends of the parent plus the income of the subsidiary less amortization expense.Thus December 31 2018 consolidated RE are $530700 as computed above. Retained Earnings Investment in Rambis Amortization for the prior years (only 2020 in this case) has not been recorded and must be brought into the consolidation through worksheet entry C. 3 Requirement b Investment in Rambis - equity method Investment in Rambis 4400 Retained Earnings 4400 Entry *C To recognize 2020 unrecognized subsidiary earnings as part of the parent's retained earnings. $18,500 net recorded by parent (income in excess of dividends). Amortization expense of $14,100 was not recorded under the initial value method. 23500-5000 = 18500 - 14100 = 4400 631000 23500 Rambis fair value 1/1/2020 Rambis Income 2020 Rambis Dividends 2020 Herbert's 2020 excess fair over book value amortisation Investment accout balance 1.1.2021 -5000 -14100 635400 Investment in Rambis - partial equity method Rambis fair value 1/1/2020 Rambis Income 2020 Rambis Dividends 2020 Investment accout balance 1.1.2021 631000 23500 -5000 649500 Investment in Rambis - Initial value method Rambis fair value 1/1/2020 Investment accout balance 1.1.2021 631000 631000