On January 1, 2015, Picnic Co. purchased 90 percent of the outstanding voting sh

Question

On January 1, 2015, Picnic Co. purchased 90 percent of the outstanding voting shares of Sweet Inc. for $540,000 cash. The acquisition date fair value of the noncontrolling interest was $60,000. At January 1, 2015, Sweet's net assets had a total carrying amount of $420,000. Equipment (8 year remaining life) was undervalued on Sweet's financial records by $80,000. Any remaining excess fair value over book value was attributed to a customer list developed by Sweet (4 year remaining life), but not recorded on its books. Sweet recorded income of $70,000 in 2015 and $80,000 in 2016. Each year since the acquisition, Sweet has declared a $20,000 dividend. At January 1, 2017, Picnic's retained earnings show a $250,000 balance.

Selected account balances for the two companies from their separate operations were as follows:

Picnic              2015 revenues    $498,000    2015 expenses    $350,000

Sweet            2015 revenues    $285,000    2015 expenses    $195,000

Assuming that Picnic, in its internal records, accounts for its investment in Sweet using the equity method, what is Picnic's share of consolidated retained earnings at January 1, 2017?

a. $315,000

b. $250,000

c. $286,000

d. $360,000

Explanation / Answer

Answer is b 250000

under the equity method of accounting Parent Company Retained Earnings = Consolidated Retained Earnings

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