On January 1, 2018, Strait Corp. purchased 100% of the outstanding common stock of Amarillo Company. On the date of the acquisition, Amarillo’ identifiable net assets had fair values that approximated their recorded book values. The acquisition resulted in no goodwill. Strait Corp. uses the cost method to account for its investment in Amarillo Company.
The following financial statement information is for Amarillo Company for the year ended December 31, 2019:
2019 |
2018 |
|
Revenues |
$100,000 |
$120,000 |
Expenses |
47,000 |
65,000 |
Net income |
$53,000 |
$55,000 |
Beginning of year retained earnings |
$680,000 |
$650,000 |
Net income |
53,000 |
55,000 |
Dividends |
-17,000 |
-25,000 |
End of year retained earnings |
$716,000 |
$680,000 |
Cash and receivables |
$235,000 |
$180,000 |
Property, plant & equipment, net |
880,000 |
800,000 |
Intangible assets |
505,000 |
450,000 |
Total assets |
$1,620,000 |
$1,430,000 |
Current liabilities |
$164,000 |
$60,000 |
Noncurrent liabilities |
400,000 |
350,000 |
Common stock |
50,000 |
50,000 |
Additional paid in capital |
290,000 |
290,000 |
Retained earnings |
716,000 |
680,000 |
Total liabilities and stockholder’s equity |
$1,620,000 |
$1,430,000 |
a. $ 990,000
b . $1,056,000
c. $1,370,000
What is the amount of the [ADJ] entry necessary to prepare the consolidated financial statements for the year ended December 31, 2019?
a. $ 25,000
b. $ 30,000
c. $ 98,000
1. As the Strait Corp. has acquired 100% of the outstanding common stock of Amarillo company, so the Total of net assets has to be taken as the value of investment in the books of strait Corp.
Calculation of Net Assets:
Total Assets for the Year ended 2019 | 1620000 |
Less: Liabilities: | |
Current Liabilities | 164000 |
Non Current Liabilities | 400000 |
Net Assets | 1056000 |
So the Balance in Equity Investment Account in Strait Corp.'s pre-consolidation Balance sheet is $1,056,000.
2. In the Equity Investment Account, for computing the value of Investment, the amount earned as profit by the Investee is added to the value of Investment and the amount paid is reduced from the Value of investment. The net proportion amount equivalent to Investment percentage is considered in the books of Investor.
The Net profits Earned during the year = $53,000
Less: Dividend distributed = $17,000
Value to be adjusted in Investment A/C = $36,000
As the percentage of Investment is 100% so we shall increase the value of investment by $36,000.
On January 1, 2018, Strait Corp. purchased 100% of the outstanding common stock of Amarillo Company....
On January 1, 2018, Strait Corp. purchased 100% of the outstanding common stock of Amarillo Company. On the date of the acquisition, Amarillo’ identifiable net assets had fair values that approximated their recorded book values. The acquisition resulted in no goodwill. Strait Corp. uses the cost method to account for its investment in Amarillo Company. The following financial statement information is for Amarillo Company for the year ended December 31, 2019: 2019 2018 Revenues $100,000 $120,000 Expenses 47,000 65,000 Net...
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