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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