Question

On January 1, two years ago, Parkway Corporation purchased all of the outstanding common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the following year. Dividends of $2,500 were declared and paid in each of those two years.

The third year of operations is now complete. For each of the two companies, selected account balances as of December 31 for this third year are as follows:
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What is consolidated retained earnings at January 1 of the third year if the parent company uses the initial value method?

Question 16 options:

	$191,100
	$192,500
	$150,000
	$134,600
	$187,100

Answer 1

Answer: $187,100.

Explanation:

Calculation of consolidated retained earnings at January 1 of the third year.

Parkway corp. retained earning beginning of the year	$150,000
Add : Equity accrual for first year (net income - dividends) [$25,000 - $2,500]	$22,500
Add : Equity accrual for second year (net income - dividends) [$32,500 - $2,500]	$30,000
Less : Amortization for first & second year [ {($20,000 / 8 years) + ($52,000 / 10 years)} * 2 years] = ($7,700 * 2 years)	($15,400)
Consolidated retained earnings at January 1 of the third year	$187,100.