Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $663,
ID: 2589323 • Letter: A
Question
Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $663,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay's equipment (with a five-year remaining life) is actually worth $611,300. Credit balances are indicated by parentheses. clay 408, 000 663,000 822, 300 (211, 00O) (350,000 Sets 259,000 Investnent in Clay Equipment Liabilities Common stock Retained earnings, 1/1/17 554, 000 (225, 000) 150,000 (438, 000 (1,332,300) In 2017, Clay earns a net income of $50,700 and declares and pays a $5,000 cash dividend. In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $189,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows: Adams clay 572,000 414,700 Not given Not given (382,000 286,500 (483,700) (150, 00O) Expenses Investment income earnings, 1/1/18 Dividends declared Common stock 8,000 (350,000) 712,000 Sets 305,200 Investnent in Clay Equipment Liabilities Not given 725, 800 (144,70O) 610,400 (192,000) a. What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the: .Equity method Initial value method. b. How does the parent's internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement? c. How does the parent's internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet? d. What is Adams's January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the: .Equity value method. Initial value method. e. What worksheet adjustment to Adams's January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method? f. Prepare the worksheet entry to eliminate Clay's stockholders' equity. g. What is consolidated net income for 2018?Explanation / Answer
Solution:
a. Acquisition-Date Fair-Value Allocation and Annual Amortization:
Clay’s acquisition-date fair value ……………………..... $663,000
Book value
(assets minus liabilities or stockholders' equity) ................ 588,000
Fair value in excess of book value ………………………... 75,000
Remaining Annual excess
Life amortizations
Allocation to equipment based on......
fair and book value difference ............ 45,700 5 yrs. $9,140
Goodwill............................................... $29,300 indefinite -0-
Total .................................................... $9,140
EQUITY METHOD
Investment Income—2018:
Equity accrual (based on Clay's net income) ...................$55,700
Amortization (above) .......................................................(9,140)
Investment income for 2018.............................................$46,560
Investment in Clay—December 31, 2018:
Consideration transferred for Clay ................................$663,000
2017:Equity accrual (based on Clay's net Income) ..........50,700
Excess amortizations (above) ..........................................(9,140)
Dividends..........................................................................(5,000)
2018: Equity accrual (based on Clay's net Income)...........55,700
Excess amortizations .................................................(9,140)
Dividends.....................................................................(8,000)
Total ...................................................................................$738,120
INITIAL VALUE METHOD
Investment Income—2018:
Dividend income.............................................................$8,000
Investment in Clay—December 31, 2018:
Consideration transferred for Clay ................................$663,000
b. The reported consolidated balances are not affected by the parent’s investment accounting method. Thus, consolidated expenses ($710,340 or $414,700 + $286,500 + amortizations of $9,140) are the same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Adams.
c. The reported consolidated balances are not affected by the parent’s investment accounting method. Thus, consolidated equipment ($1,363,620 or $725800 + $610,400 + allocation of $45700 – two years of excess depreciation totaling $18,280) is the same regardless of whether the equity method or the initial value method is applied by Adams.
d. Adams retained earnings—Equity method
Adams retained earnings—1/1/17........................................$1,332,300
Adams income 2017...............................................................189,000
2017 equity accrual for Clay income....................................50,700
2017 excess amortization...................................................... (9,140)
Adams retained earnings—1/1/18........................................$1,562,860
Adams retained earnings—Initial value method
Adams retained earnings—1/1/17........................................$1,332,300
Adams income 2017...............................................................189,000
2017 dividend income from Clay..........................................5,000
Adams retained earnings—1/1/18........................................$1,526,300
e. EQUITY METHOD—Entry *C is not utilized since parent's retained earnings balance is correct.
NITIAL VALUE METHOD—Entry *C is needed to recognize increase in subsidiary's book value ($50,700 income less 5,000 dividends) and amortization ($9,140) for prior year.
Investment in Clay ................................................36,560
Retained earnings, 1/1/18 (parent) .................36,560
f. Consolidated worksheet entry S for 2015:
Common stock (Clay) .....................................150,000
Retained earnings, 1/1/15 (Clay)......................483,700
Investment in Clay .....................................633,700
g. Consolidated revenues (combined) ..................................................$954,000
Consolidated expenses (combined plus excess amortization) .............(710,340)
Consolidated net income ......................................................................$243,660
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