Problem

On January 1, 2012, Pinnacle Corporation exchanged $3,200,000 cash for 100 percent of the...

On January 1, 2012, Pinnacle Corporation exchanged $3,200,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the fol­-

lowing balance sheet:

Cash

$ 122,000

Accounts payable

$ 375,000

Accounts receivable

283,000

Long-term debt

2,655,000

Inventory

350,000

 

Common stock

1,500,000

Buildings (net)

1,875,000

Retained earnings

1,100,000

Licensing agreements

3,000,000

 

 

 

 

$ 5,630,000

 

$5,630,000

Fair value of Strata (consideration transferred)

 

$ 3,200,000

Carrying amojjnt acquired

 

2,600,000

Excess fair value

 

600,000

to buildings (undervalued)

300,000

 

to licensing agreements (overvalued)

(100,000)

200,000

to goodwill (indefinite life)

 

$ 400,000

Pinnacle prepared the following fair-value allocation:

At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements wire due to expire in 5 years. At December 31, 2013, Strata’s accounts payable included an $85,000 current liability owed to Pinnacle. Strata Corporation continues its sepa­rate legal exislence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata.

The separate financial statements for the two companies for the year ending December 31, 2013, follow. Credit balances are indicated by parentheses.

 

Pinnacle

Strata

Sales

$ (7,000,000)

$(3,000,000)

Cost of gdods sold

4,650,000

1,700,000

Interest expense

255,000

160,000

Depreciation expense

585,000

350,000

Amortization expense

 

600,000

Dividend income

(50,000)

 

Net income

$(1,560,000)

$'(190,000)

Retained earnings 1/1/13

$ (5,000,000)

$(1,350,000)

Net income

(1,560,000)

(190,000)

Dividends paid

560,000

50,000

Retained earnings 12/31/13

$ (6,000,000)

$(1,490,000)

Cash

. $ 433,000

$ 165,000

Accounts receivable

1,210,000

200,000

Inventory

1,235,000

1,500,000

Investment in Strata

3,200,000

 

Buildings (net)

5,572,000

2,040,000

Licensing agreements

 

1,800,000

Goodwill

350,000

 

Total assets

$12,000,000

$ 5,705,000

Accounts payable

 $ (300,000)

$ (715,000)

Long-term debt

 (2,700,000)

(2,000,000)

Common stock

 (3,000,000)

(1,500,000)

Retained earnings 12/31/13

 (6,000,000)

(1,490,000)

Total liabilities and OE

 $(12,000,000)

$(5,705,000)

a. Prepare a worksheet to consolidate the financial information for these two companies.

b. Compute the following amounts that would appear on Pinnacle’s 2013 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.

1. Subsidiary income

2. Retained earnings 1/1/13

3. Investment in Strata

c. What effect does the parent's internal investment accounting method have on its consolidated financial statements?

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