Foxx Corporation acquired all of Greenburg Company’s outstanding stock on Januar
ID: 2530240 • Letter: F
Question
Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2013, for $600,000 cash. Greenburg’s accounting records showed net assets on that date of $470,000, although equipment with a 10-year remaining life was undervalued on the records by $90,000. Any recognized goodwill is considered to have an indefinite life.
Greenburg reports net income in 2013 of $90,000 and $100,000 in 2014. The subsidiary declared dividends of $20,000 in each of these two years.
Financial figures for the year ending December 31, 2015, follow. Credit balances are indicated by parentheses.
a.Determine the December 31,2015, consolidated balance for each of the following accounts:
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, 2015, if each of the following methods had been in use?
•Initial value method.
•Partial equity method.
•Equity method.
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, 1/1/15 . . . . . . . . . $(1,100,000) $ (320,000) Net income . . . . . . . . . . . . . . . . . . . . (420,000) (100,000) Dividends declared . . . . . . . . . . . . . . 120,000 20,000 Retained earnings, 12/31/15? . . . . $(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 . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 100,000 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)Explanation / Answer
PART-1)
Depreciation Expense
659,000
Dividends Declared
120,000
Revenues
1,400,000
Equipment
1,563,000
Buildings
1,200,000
Goodwill
40,000
Common stock
900,000
Working:
??Consideration transferred
600,000 ??
??Book value (as provided)
(470,000)??
??Fair value in excess of book value
130,000 ??
??Fair value in excess of book value
130,000 ?
???Allocation to equipment based on ?difference in fair and book value
90,000
10 yrs. ????
??Goodwill
40,000 ?
?indefinite ?
0 ??????
?????Total
9,000 ??????
Consolidated balances
??
Depreciation expense = $659,000 (book values plus $9,000 excess depreciation)
??
Dividend paid : $120,000 (only parent balance. Subsidiary's dividends are eliminated as intra-entity transfer)
??
Revenues: $1,400,000 (plus book values)
??
Equipment: $1,563,000 (plus book values: $90,000 allocation minus three years of excess depreciation [$27,000])
??
Buildings : $1,200,000 (plus book values)
??
Goodwill : $40,000 (original residual allocation)
??
Common stock : $900,000 (only parent balance )
?
PART-2) No, would not affect consolidated totals however only internal reporting of parent
PART-3) Initial vaue method of accounting for this subsidiary is the parent actually using for the purposes of internal reporting
PART-4)
Partial equity method
1,00,000
Equity method
91,000
Working:
When the partial equity method had been applied, the investment income account would have reflected an equity accrual of $100,000. If the equity method had been utilized, the Investment Income account would have included the equity accrual of $100,000 as well as excess amortizations of $9,000 for a balance of $91,000
?
PART-5)
Initial value method
1,100,000
Partial equity method
1,250,000
Equity method
1,232,000
Working:
Partial equity method
??Foxx’s balance? (initial value method)
1,100,000 ?
Net equity accrual for Greenburg (=90,000 - 20,000)
70,000 ?
Net equity accrual for Greenburg (=100,000 - 20,000)
80,000 ?
??Foxx’s retained earnings
1,250,000
Equity method:
??Foxx’s balance? (initial value method)
1,100,000 ?
Net equity accrual for Greenburg (=90,000 - 20,000)
70,000 ?
Excess fair over book value amortization
(9,000)?
Net equity accrual for Greenburg (=100,000 - 20,000)
80,000 ?
Excess fair over book value amortization
(9,000)?
??Foxx’s retained earnings
1,232,000 ?
Depreciation Expense
659,000
Dividends Declared
120,000
Revenues
1,400,000
Equipment
1,563,000
Buildings
1,200,000
Goodwill
40,000
Common stock
900,000
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