Question

Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $510,000 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 $440,000. Credit balances are indicated by parentheses.

	Adams		Clay
Current assets	$	300,000	$	220,000
Investment in Clay		510,000		0
Equipment		600,000		390,000
Liabilities		(200,000)		(160,000)
Common stock		(350,000)		(150,000)
Retained earnings, 1/1/20		(860,000)		(300,000)

In 2020, Clay earns a net income of $55,000 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:

  

	Adams			Clay
Revenues	$	(400,000	)	$	(240,000	)
Expenses		290,000			180,000
Investment income		Not given			0
Retained earnings, 1/1/21		Not given			(350,000	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		580,000			262,000
Investment in Clay		Not given			0
Equipment		520,000			420,000
Liabilities		(152,000	)		(130,000	)

  

1. What are the December 31, 2021, Investment Income and Investment in Clay account balances assuming Adams uses the:

• Equity method.
• Initial value method.

1. What is the amount of Consolidated Expenses in its December 31, 2021, consolidated income statement under each of the following methods?

2. What is the amount of Consolidated Equipment in its December 31, 2021, consolidated balance sheet under each of the following methods?

3. What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the

• Equity value method.
• Initial value method.

1. What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

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

3. What is consolidated net income for 2021?

Complete this question by entering your answers in the tabs below. Req A Req B to D Req E and F Reg G b. What is the amount of Consolidated Expenses in its December 31, 2021, consolidated income statement under each of the following methods? c. What is the amount of Consolidated Equipment in its December 31, 2021, consolidated balance sheet under each of the following methods? d. What is Adams's January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the Equity value method. Initial value method. Show less b. Consolidated Expense $ 480,000 C. Consolidated Equipment 970,000 d. Retained Earnings Equity method $ 1,030,000 $ 990,000 Initial value method Partial equity method

Answer 1

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a. Determine the investment income for 2015 and the balance in Investment in Clay account as on December 31, 2015 assuming that Adams uses the: Equity method Investment Income $ 50,000 $ 8,000 Investment in Clay $ 592,000 $ 510,000 Initial value method b. How does the parent's internal investment accounting method choice affect the amount reported for expenses in its December 31, 2015, consolidated income statement? Equity method Initial value method Partial equity method Consolidated Expense $ 480,000 $ 480.000 $ 480.000 C. How does the parent's internal investment accounting method choice affect the amount reported for equipment in its December 31, 2015, consolidated balance sheet? Equity method Initial value method Partial equity method Consolidated Equipment $ 970,000 $ 970.000 $ 970.000 d. What is Adams's January 1, 2015, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the: Equity method Initial value method Retained Earnings $ 1,030,000 $ 990,000 e. What worksheet adjustment to Adams's January 1, 2015, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method? (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Debit Credit Date Consolidating Entries (1) Prepare the entry needed January 01, 2015 Investment in Clay Retained earnings, 1/1/15 (Parent) 40,000 40,000 f. Prepare the worksheet entry to eliminate Clay's stockholders' equity. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Date Consolidating Entries Debit Credit (1) Prepare entry S. December 31, 2015 Common stock - (Clay) Retained earnings, 1/1/15 (Clay) Investment in Clay 150,000 350,000 500,000 Scanned by TapScanner

g. What is consolidated net income for 2015? Consolidated net income $ 160.000 Explanation: a. Acquisition-date allocation and annual amortization: Clay's acquisition-date fair value Book value (assets minus liabilities or stockholders' equity) $510.000 450,000 Fair value in excess of book value $ 60,000 Life Annual excess amortizations $ 60,000 Fair value in excess of book value Allocation to equipment based on difference between fair and book value 50,000 5 yrs $10,000 Goodwill $ 10,000 indefinite 0 Total $10,000 Equity method Investment income2015: Equity accrual (based on Clay's net income) Amortization (above) $ 60.000 (10,000) Investment income for 2015 $ 50,000 $510,000 Investment in Clay-December 31, 2015: Consideration transferred for Clay 2014: Equity accrual (based on Clay's net income) Excess amortizations (above) Dividends 2015: Equity accrual (based on Clay's net income) Excess amortizations Dividends 55.000 (10,000) (5,000) 60,000 (10,000) (8,000) Total $592,000 Initial value method Investment income-2015: Dividend income $ 8.000 Investment in Clay-December 31, 2015: Consideration transferred for Clay $ 510,000 b. The reported consolidated balances are not affected by the parent's investment accounting method. Thus, consolidated expenses ($480,000 or $290,000 + $180,000 + amortizations of $10,000) are the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Adams. c. The reported consolidated balances are not affected by the parent's investment accounting method. Thus, consolidated equipment ($970,000 or $520,000 + $420,000 + allocation of $50,000 - depreciation totaling $20,000) is the same regardless of whether the equity method Scanned by TapScanner method is applied by Adams.

d. Adams retained earnings-Equity method Adams retained earnings-1/1/14 Adams income 2014 2014 equity accrual for Clay income 2014 excess amortization $ 860,000 125,000 55,000 (10.000) Adams retained earnings-1/1/15 $1,030,000 Adams retained earnings—Initial value method Adams retained earnings-1/1/14 Adams income 2014 2014 dividend income from Clay $ 860,000 125.000 5,000 Adams retained earnings—1/1/15 $ 990.000 e. Initial value method-Entry *C is needed to recognize increase in subsidiary's book value ($55,000 income less 5,000 dividends) and amortization ($10,000) for prior year. g. $ 640,000 Consolidated revenues (combined) Consolidated expenses (combined plus excess amortization) (480,000) Consolidated net income $ 160,000 Scanned by TapScanner

Answer 2

20. Adams, Inc., acquires Clay Corporation on January 1, 2010, in exchange for $510,000 cash. Immedi￾ately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year life) is actually worth $440,000. Credit balances are indicated by parentheses.