Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2013 (credit balances indicated by parentheses). Michael acquired all of Aaron’s outstanding voting stock on January 1, 2009, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company’s stock actively traded at $23.50 per share.
| Michael Company | Aaron Company |
| 12/31/13 | 12/31/13 |
Revenues | $ (610,000) | $ (370,000) |
Cost of goods sold | 270,000 | 140,000 |
Amortizations expense | 115,000 | 80,000 |
Dividend incom | (5,000) | –0– |
Net income | $ (230,000) | $ (150,000) |
Retained earnings, 1/1/13 | $ (880,000) | $ (490,000) |
Net income (above) | (230,000) | (150,000) |
Dividends paid | 90,000 | 5,000 |
Retained earnings, 12/31/13 | $(1,020,000) | $ (635,000) |
Cash | $ 110,000 | $ 15,000 |
Receivables | 380,000 | 220,000 |
Inventory | 560,000 | 280,000 |
Investment in Aaron Company | 470,000 | –0– |
Copyrights | 460,000 | 340,000 |
Royalty agreements | 920,000 | 380,000 |
Total assets | $ 2,900,000 | $ 1,235,000 |
Liabilities | $ (780,000) | $ (470,000) |
Preferred stock | (300,000) | –0– |
Common stock | (500,000) | (100,000) |
Additional paid-in capital | (300,000) | (30,000) |
Retained earnings, 12/31/13 | (1,020,000) | (635,000) |
Total liabilities and equity | $(2,900,000) | $(1,235,000) |
On the date of acquisition, Aaron reported retained earnings of $230,000 and a total book value of $360,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year 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.
a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2013.
b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent’s individual financial statements?
c. Assuming that Michael applied the equity method to this investment, what changes would be necessary in the consolidation entries found on a December 31, 2013, worksheet?
d. Assuming that Michael applied the equity method to this investment, what changes would be created in the consolidated figures to be reported by this combination?
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