Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $646,000 cash. Greenburg’s accounting records showed net assets on that date of $497,000, although equipment with a 10-year life was undervalued on the records by $66,000. Any recognized goodwill is considered to have an indefinite life.

Greenburg reports net income in 2016 of $119,000 and $100,500 in 2017. The subsidiary declared dividends of $20,000 in each of these two years.

Account balances for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

	Foxx				Greenburg
Revenues	$	(868,000	)		$	(652,000	)
Cost of goods sold		108,500				163,000
Depreciation expense		370,000				406,000
Investment income		(20,000	)			0
Net income	$	(409,500	)		$	(83,000	)
Retained earnings, 1/1/18	$	(1,246,000	)		$	(408,000	)
Net income		(409,500	)			(83,000	)
Dividends declared		120,000				20,000
Retained earnings, 12/31/18	$	(1,535,500	)		$	(471,000	)
Current assets	$	305,000			$	118,000
Investment in subsidiary		646,000				0
Equipment (net)		1,088,000				700,000
Buildings (net)		968,000				526,000
Land		674,000				122,000
Total assets	$	3,681,000			$	1,466,000
Liabilities	$	(1,245,500	)		$	(695,000	)
Common stock		(900,000	)			(300,000	)
Retained earnings		(1,535,500	)			(471,000	)
Total liabilities and equity	$	(3,681,000	)		$	(1,466,000	)

1. Determine the December 31, 2018, consolidated balance for each of the following accounts:

Depreciation Expense	Buildings
Dividends Declared	Goodwill
Revenues	Common Stock
Equipment

2. How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?

3. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

4. Determine parent's investment income for 2018 under partial equity method and equity method.

5. What would be Foxx’s balance for retained earnings as of January 1, 2018, if each of the following methods had been in use?

• Initial value method.
• Partial equity method.
• Equity method.

Answer 1