Foxx Corporation acquired all of Greenburg Company’s outstanding stockon January 1,2011, for $600,000 cash. Greenburg’s accounting records showed net assetson that date of$470,000,although equipment with a 10-year life was undervalued on the recordsby $90,000.Any recognized goodwill is considered to have an indefinite life.
Greenburg reports net income in 2011 of $90,000 and $100,000in 2012.The subsidiary paid dividends of $20,000 in each of these two years.Financial figures for the year ending December 31,2013, follow. Credit balances are indicated by parentheses.
| Foxx | Greenburg |
Revenues | $ (800,000) | $ (600,000) |
Cost of goods sold | 100,000 | 150,000 |
Depreciation expense | 300,000 | 350,000 |
Investment Income | (20,000) | -0- |
Net income | $ (420,000) | $ (100,000) |
Retained earnings, 1/1/13 | $ (1,100,000) | $ (320,000) |
Net income | (420,000) | (100,000) |
Dividends paid | 120,000 | 20,000 |
Retained earnings, 12/31/13 | $ (1,400,000) | $ (400,000) |
Current assets | $ 300,000 | $ 100,000 |
Investment in subsidiary | 600,000 | -0- |
Equipment (net) | 900,000 | 600,000 |
Buildings (net) | 800,000 | 400,000 |
Land | 600,000 | 020,000 |
Total assets | $ 3,200,000 | $ 1,200,000 |
Liabilities | $ (900,000) | $ (500,000) |
Common stock | (900,000) | (300,000) |
Retained earnings | (1,400,000) | (400,000) |
Total liabilities and equity | $(3,200,000) | $(1,200,000) |
a. Determine the December 31,2013, consolidated balance for each of the following accounts:
Depreciation Expense | Buildings |
DividendsPaid | Goodwill |
Revenues | Common Stock |
Equipment |
|
b. How does the parent’s choice of an accounting method for its investment affect the balances computed in requirement (a)?
c. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
d. If the parent company had used a different method of accounting for this investment, how could that method have been identified?
e. What would be Foxx’s balance for retained earnings as of January 1, 2013, if each of the following methods had been in use?
Initial value method
Partial equity method
Equity method
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