Question
In: Accounting
On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star,...
On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. for $622,000 cash. The acquisition-date fair value of the noncontrolling interest was $69,000. At January 1, 2016, Star’s net assets had a total carrying amount of $483,000. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $52,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (four-year remaining life), but not recorded on its books. Star recorded net income of $45,500 in 2016 and $52,000 in 2017. Each year since the acquisition, Star has declared a $13,000 dividend. At January 1, 2018, Pride’s retained earnings show a $162,500 balance.
Selected account balances for the two companies from their separate operations were as follows:
| Pride | Star | |||||
| 2018 Revenues | $ | 323,800 | $ | 185,400 | ||
| 2018 Expenses | 227,800 | 126,900 | ||||
1) What is consolidated net income for 2018?
Multiple choice:
-
$123,000.
-
$109,000.
-
$125,900.
-
$154,500.
2. Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet?
Multiple Choice
-
$273,000.
-
$162,500.
-
$414,000.
-
$186,400.
Solutions
Expert Solution
(a) option c = $103,000
| Consolidated Net income | ||
| Consideration transferred by Pride | $ 6,22,000 | |
| Noncontrolling interest fair value | $ 69,000 | |
| Star acquisition-date fair value | $ 6,91,000 | |
| (Star book value) | $ -4,83,000 | |
| Excess fair over book value | $ 2,08,000 | |
| Amortization | ||
| to equipment (8 year remaining life) $ 52000 | $ 6,500 | |
| to customer list (4 year remaining life) 128,000 | $ 39,000 | |
| $ 45,500 | ||
| Combined revenues | $ 5,09,200 | |
| Combined expenses | $ 3,54,700 | |
| Excess fair value amortization | $ 45,500 | $ 4,00,200 |
| Consolidated net income |
$ 1,09,000 |
|
(b)Option b = $162,000
Under Equity Method,Consolidated retained earnings = Parent's retained earnings.
At January 1, 2018, Pride’s retained earnings show a $162,500 balance.
so,amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet = $162,000
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