Fesler Inc. acquired all of the outstanding common stock of Pickett Company on J

Question

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the takeover, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance. Fesler reported net income of $100,000 in 2012 and $68,000 in 20013 and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013 and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidary Income.

A. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2013?

B. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2013?

C. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2013?

Explanation / Answer

Under the equity method, the parent accrues subsidiary earnings and amortizationexpense (associated with the acquisition price in a purchase) in the same manner as inthe consolidation process. The equity method parallels consolidation. Thus, the parent’snet income and retained earnings each year will equal the consolidated totals

The partial equity method, in contrast, records the subsidiary’sbook value increases and decreases but not amortizations.

C)

Any dividends received are recognized as income but no other investment entries are made. Thus, the initial value method is easy to apply

Fesler Pickett Retained earnings    520,000    240,000 Annual amortisation    (22,000) 2012 net income    100,000      24,000 2013 net income      68,000      36,000 Dividend 2012    (25,000)    (10,000) Dividend 2013    (25,000)    (10,000) Net    616,000    280,000 Consolidated    896,000

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