Question

Problem 3-29 (LO 3-1, 3-3a, 3-3b, 3-4) Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances indicated by parentheses). Michael acquired all of Aaron's outstanding voting stock on January 1, 2014, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company's stock actively traded at $36 per share. Michael Company 12/31/18 Aaron Company 12/31/18 (478,500) Revenues (725,500) S Cost of goods sold Amortization expense Dividend income 327,750 194,250 137,700 119,000 (5,000) 0 (265,050) S (165,250) Net income Retained earnings, 1/1/18 Net income (above) $(1,048,000) (265,050) 90,000 (819,000) (165,250) Dividends declared 5,000 $(1,223,050) (979,250) Retained earnings, 12/31/18 Cash 167,000 S 20,600 Receivables 402,000 633,000 710,000 291,000 Inventory Investment in Aaron Company Copyrights Royalty agreements 342,000 0 522,000 419,000 999,000 419,000 $ 1,491,600 3,433,000 Total assets Liabilities $(1,109,950) (300,000) (500,000) (300,000) (1,223,050) S (382,350) Preferred stock 0 Common stock (100,000) (30,000) (979,250) Additional paid-in capital Retained earnings, 12/31/18 Total liabilities and equity (3,433,000) $(1,491,600) On the date of acquisition, Aaron reported retained earnings of $470,000 and a total book value of $600,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its bookks. Aaron declared and paid dividends in the same period. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2018. b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required A Required B Using the preceding information, prepare a accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the consolidation worksheet for these two companies as of December 31, 2018. (For debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.) Show less MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Consolidated Credit Accounts Michael Aaron Debit Totals Revenues (725,500) S (478,500) (1,204,000) Cost of goods sold 327,750 194,250 522,000 Amortization expense 119,000 137,700 271,700 Dividend income (5,000) C 5,000 (265,050) S (165,250) (410,300) Net income Retained earnings, 1/1 (Michael) Retained earnings, 1/1 (Aaron) Net income (above) (1,048,000) 0 C (819,000) 0 (265,050) (165,250) S (410,300) Dividends declared 90,000 90,000 5,000 5,000 $ (1,223,050) (320,300) (979,250) Retained earnings, 12/31 Cash 167,000 S 20,600 Receivables 402,000 291,000 Inventory 633,000 342,000 Investment in Aaron Co. 710,000 0 Copyrights Royalty agreements 522,000 419,000 999,000 419,000 Trademark C 0 $ 3,433,000 1,491,600 0 Total assets $ (1,109,950) Liabilities (382,350) Preferred stock (300,000) 0 Common stock (500,000) (100,000) Additional paid-in capital Retained earnings, 12/31 (above) Total liabilities and equity (300,000) (30,000) (1,223,050) (979,250) (320,300) $ (3,433,000) $ (1,491,600) $ 5,000 (320,300) 5,000 On the date of acquisition, Aaron reported retained earnings of $470,000 and a total book value of $600,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2018. b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements? Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements? Required B Required A

Answer 1

As the company applies the Initial value method because in Income statement only dividend income from subsidiary has been recognized. So, under the Initial Value method investment in subsidiary will not change. Acquisition Date Fair Value Allocation Fair Value of Aaron 710,000 Less: Book Value of Aaron (600,000) Excess of Fair Value Over Book Value 110,000 Allocation of Excess Fair value of book Value Royalty Agreements 60,000 Trademark 50,000 Amortization of Acquired Assets Life (years) (B) Amortization per Amount as on |1/1/14 (A) year (A/B) Assets Royalty Agreements 60,000 6 10,000 Trademark 50,000 10 5,000 01/01/18 Value of Acquired Assets and Accumulated Amortization as on Accumulated Amortization Value as on Amount as on |1/1/14 (A) (01/01/14 to 31/12/17) [B 12/31/17 (A-B) Royalty Agreements 60,000 40,000 20,000 20,000 Tradermark 30,000 50,000 Total 110,000 60,000 50,000 *Accumulated Amortization (Amortization per year 4 years)

MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2018 Adjustment Entries Credit Consolidated Totals Michael Aaron Debit Accounts (1,204,000) (725,500) (478,500) Revenue Cost of goods sold 522,000 327,750 194,250 119,000 [E] Amortization expense 137,700 15,000 271,700 Dividend Income (5,000) 5,000 (410,300) (265,050) (165,250) Net Income (819,000) [S] 289,000 *C] Retained Earnings 01/01/18 Net Income(above) (1,048,000) 819,000 (1,337,000) (265,050) (165,250) (410,300) Dividend 90,000 5,000 5,000 90,000 Retained Earnings 12/31/18 (1,223,050) (979,250) (1,657,300)

Cash 167,000 20,600 291,000 187,600 Receivables 402,000 693,000 342,000 Inventory 633,000 975,000 999,000 [S+A] Investment in Aaron Company [*C] 710,000 289,000 Copyrights Royalty Agreements 419,000 522,000 941,000 419,000 A] 10,000 E 5,000 [E 999,000 20,000 1,428,000 Trademarks [A] 30,000 25,000 Total Assets 1,491,600 3,433,000 4,249,600 Liabilities (1,109,950) (382,350) (1,492,300) (300,000) (500,000) (300,000) (500,000) Preferred Stock (100,000) S] (30,000) [S] (979,250) Common Stock 100,000 Additional paid-in capital Retained Earnings 12/31/18 (300,000) (1,223,050) 30,000 (300,000) (1,657,300) (4,249,600) Total liabilities (3,433,000) (1,491,600) 1,308,000 1,308,000 Entries Explanation [*C] Conversion from Initial Method to Equity method Retained Earnings of Aaron 01/01/18 Retained Earnings at the date of 819,000 acquisition 470,000 Increase in Retained Earnings 349,000 Less: Accumulated Amortization (60,000) Conversion to Equity Method 289,000 [S] Is to eliminate the subsidiary stockholders' equity [A] is to record the unamortized value of assets as on 01/01/18 |[E] is to record the amortization expenses during the year

b] Assuming that the Michael has applied the equity 1) Equity in Earnings of Aaron $ 150,250 Net Income of Aaron 2018 165,250 Less: Amortization expenses during the year (15,000) Equity in earnings of Aaron 150,250 2) Retained Earnings 01/01/18 $ 1,337,000 Retained Earnings as on 01/01/18 (Intial Value) 1,048,000 Add: Increase in retained earnings of Aaron 289,000 Retained Earnings as on 01/01/18 (Equity Method) 1,337,000 $ 3) Investment in Aaron 1,144,250 Investment in Aaron (Initial Value) 710,000 Add: Increase in retained earnings of Aaron 289,000 Ad: Equity Earnings of Aaron 150,250 Less: Dividend declared by the Aaron (5,000) Investment in Aaron (Equity Value) 1,144,250 Equity in earnings of Aaron Retained Earnings 01/01/18 $ 150,250 $ 1,337,000 $ Investment in Aaron 1,144,250