Question

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $674,800 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $638,700. Credit balances are indicated by parentheses.

Adams Clay Current assets $ 388,000 $ 241,000 Investment in Clay 674,800 0 Equipment 884,700 570,000 Liabilities (200,000 ) (216,000 ) Common stock (350,000 ) (150,000 ) Retained earnings, 1/1/17 (1,397,500 ) (445,000 ) In 2017, Clay earns a net income of $53,400 and declares and pays a $5,000 cash dividend.

In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $145,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

Adams Clay Revenues $ (506,000 ) $ (272,000 ) Expenses 366,850 204,000 Investment income Not given 0 Retained earnings, 1/1/18 Not given (493,400 ) Dividends declared 0 8,000 Common stock (350,000 ) (150,000 ) Current assets 669,000 311,500 Investment in Clay Not given 0 Equipment 760,700 626,100 Liabilities (131,000 ) (175,500 )

A: What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the:

Equity method.

Initial value method.

B: How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement?

C: How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet?

D: What is Adams’s January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

Equity value method.

Initial value method.

E: What worksheet adjustment to Adams’s January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

F: Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

G: What is consolidated net income for 2018?

Adams, Inc. acquires Clay Corporation on January 2017 in exchange for $674 800 Immesyate the acquisition, the two companies have the following account balanced Clay'i equipment in a five-year remaining life is actually worth $638700 Credit Dances are indicated by parentheses $ 0.00 Current sets Invest in Clay toupent Liit Common stock 14.00 579,00 (206,00 190.000 (15 In 2017. Clay earns a net income of 553.400 and declares and pays a 55.000 cash dividend. In 2017, Adams reports net income from ts own operations exclusive of any income from Clay of 5545,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows: Related res. 1/3 5.000.000 204,000 (0) 3.000 (350,000 60.00 311,500 . 25.100 (175.500 Current Inventi tot

Answer 1

Answer 674,800 150,000 445000 Consideration paid by Adam Less Book value of day Common stock Retained Earning Encess fair value over book value Allocation of Encess value Equipment (fair value - Book value] Excess value allocated to good will ( 59 5,000) 79,800 68700 (638700 - 570000) Remaining (79800-68700) 1), 100 Rapriciation of Excess vabel Allocatio to equipment & Goodwill life cyrs.) Dep. per year Equipment Goodwill Assets Amount 68700 11,100 5 N/A 131750 Equity Method Investment in clay as on 11/2017 Add: Net income of clay in 2017 less Debrication expenses in 2017 Less: Diuident recieve in 2017 Balanced as on 1/1/2018 Add: Nel income in clay ( 272000 - 204 000) less: Depreciation in 2018 Les : Divident rec. in 2018 Balance as on 12/31/2018 674,800 5 3you (13750) (5000) 709 450 70945o 68,000 (13750) ( 8000) 7 55,300

Investment income 2018 Net income of day in 2018 wex: Depricchico exp.in 2018 Investment in income in 2018 68000 (13750) 54,250 will not changes 674, 800 Initial value method under initial value method in clay So investment bal as on 12/31/2018 Investment in Income Diuident reciene from day 3000 a 1- Equity method 54250 8000 755, 700 6 74,800 Initial value method 2. remain same Consolidation Expenses Under all the method expenses and equipment calculation Expenses of adam 366850 Expenses of clay + 204000 Addi dep of equipment in 2018 570850 Consolidation expenses Add: sup of equipment in 2018 (13750) consolidation expenses 557100

| Page No Date 3 Consolidated Equipment wolus ag on 12/31/2018 Adams clay on 1/1/17 760 700 + 6 26 100 1386,800 54250 (13750) (13750) 1413550 2017 2018 4 as on 0/01/2018 Add: Encess value acquired less: Dep. of excess value during less: Consolidated Equipment valus on 12/31/2018 Calculation Returned Earnings Equity method Retainid forening of adam os 01/1/2017 Add: Net income popie Add: not income of of clay consolidatted Retained Less: Dep. Expenses Consolidated Retained Earning on 11/18 adams 13 97500 145,000 53400e (13750) 15 82150 Initial Value Method Add: Met income of day Retained forening Adam as on 01/01/2017 Add Dividend income recieved from 1397500 145000 5000 1547500 on Ecoining (6) Consoildiated Expenses 5571.00 55 7100 55 7100 Equity method (c) Consolidated (d) Retained Equipment 1413550 1582150 14135so 1547500 1413550 Initial Value Partial Equity method

Dale 5 Date Accounts Debit Credit 34,650 Investment in clay 34,650 Retained earning 01/01/2018 (Adams (to record the adjustment in retained earning for recording retained earning as per equity method) Retained Earning as equity method as initial value method Adjustment in retained earning Accounts 31/12/18 Common Stock, clay Retuined Sarning Wie, clay To Investment in Clay ( to eliminate the clay's stockholder's equity) 1582150 1547500 34650 6 Date Cr. Dr. 150 000 493400 643,400 7 Revenue Adam day Expenses 506000 2 72000 (366850 ) (204000) Less: Adjustment of Dep. Eap on Equipment 2018 Consolidated Net income of 2018 Total 778000 (570,850) (13750) 193400 Consolidated income 193 yoo
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