Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2020, for $654,000 in cash. Annual excess amortization of $11,400 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $401,000, and Rambis reported a $207,000 balance. Herbert reported internal net income of $56,500 in 2020 and $73,100 in 2021 and declared $10,000 in dividends each year. Rambis reported net income of $22,700 in 2020 and $39,300 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.

Amounts Consolidated retained earnings (equity method) Consolidated retained earnings (initial value method) Consolidated retained earnings (partial equity method)

Answer 1

Answer:-

Part a)

The amount reported as consolidated retained earnings on December 31, 2021

Particulars	Amount
Herbert (Parent) Retained Earning Balance as on 1/1/2020	$401,000
Herbert Income for 2020	$56,500
Herbert Dividends for 2020	($10,000)
Rambis Income for 2020	$22,700
Amortization for 2020	($11,400)
Herbert Income for 2021	$73,100
Herbert Dividends for 2021	($10,000)
Rambis Income for 2021	$39,300
Amortization for 2021	($11,400)
Consolidated Retained Earnings as on 31/12/2021	$549,800

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 would be same at $549,800 as the methodology to find the consolidated retained earnings would continue to be the same.

Part b)

The Investment in Rambis account balance on Herbert’s books on January 1, 2021 under each method is calculated as below:

Parent Uses the Equity Method

Rambis Fair Value as on 1/1/2020	654,000
Rambis Income for 2020	22,700
Rambis Dividend for 2020	-5,000
Annual Excess Amortization	-11,400
Investment Account Balance as on 1/1/2021	$660,300

Parent Uses the Partial Equity Method

Rambis Fair Value as on 1/1/2020	654,000
Rambis Income for 2020	22,700
Rambis Dividend for 2020	-5,000
Investment Account Balance as on 1/1/2021	$671,700

Parent Uses the Initial Value Method

Rambis Fair Value as on 1/1/2020	654,000
Investment Account Balance as on 1/1/2021	$654,000

Part c)

The Entry *C on a 2021 consolidation worksheet under each method is given as below:

Parent Uses the Equity Method

Date	Account Titles	Debit	Credit
January 1, 2021	No Entry Required	$0
	No Entry Required		$0

Parent Uses the Partial Equity Method

Date	Account Titles	Debit	Credit
January 1, 2021	Retained Earnings, 1/1/21	$11,400
	Investment in Rambis		$11,400

Parent Uses the Initial Value Method

Date	Account Titles	Debit	Credit
January 1, 2021	Investment in Rambis (22,700 - 5,000 - 11,400)	$6,300
	Retained Earnings, 1/1/21		$6,300

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