Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, for $638,000 in cash. Annual excess amortization of $20,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $405,000, and Rambis reported a $252,000 balance. Herbert reported internal net income of $40,500 in 2017 and $52,300 in 2018 and declared $10,000 in dividends each year. Rambis reported net income of $29,500 in 2017 and $41,300 in 2018 and declared $5,000 in dividends each year.

a. Assume that Herbert’s internal net income figures above do not include any income from the subsidiary.

If the parent uses the equity method, what is the amount reported as consolidated retained earnings on December 31, 2018?

What would be the amount of consolidated retained earnings on December 31, 2018, if the parent had applied either the initial value or partial equity method for internal accounting purposes?

b. Under each of the following situations, what is the Investment in Rambis account balance on Herbert’s books on January 1, 2018?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

c. Under each of the following situations, what is Entry *C on a 2018 consolidation worksheet?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, for $638,000 in cash. Annual excess amortization of $20,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $405,000, and Rambis reported a $252,000 balance. Herbert reported internal net income of $40,500 in 2017 and $52,300 in 2018 and declared $10,000 in dividends each year. Rambis reported net income of $29,500 in 2017 and $41,300 in 2018 and declared $5,000 in dividends each year.

a. Assume that Herbert’s internal net income figures above do not include any income from the subsidiary.

If the parent uses the equity method, what is the amount reported as consolidated retained earnings on December 31, 2018?

What would be the amount of consolidated retained earnings on December 31, 2018, if the parent had applied either the initial value or partial equity method for internal accounting purposes?

b. Under each of the following situations, what is the Investment in Rambis account balance on Herbert’s books on January 1, 2018?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

c. Under each of the following situations, what is Entry *C on a 2018 consolidation worksheet?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

Answer 1

CONSOLIDATED RETAINED EARNINGS-EQUITY METHOD

Herbert (parent) balance—1/1/17..................................$405,000

Herbert income—2017 ..................................................40,500

Herbert dividends—2017

(subsidiary dividends are intercompany and, thus, eliminated) ......................(10000)

Rambis income—2017 (not included in parent's income).........29500

Amortization—2017 ......................................................(20000)

Herbert income—2018....................................................52300

Herbert dividends—2018...........................................(10000)

Rambis income—2018..............................................41300

Amortization—2018 ....................................................(20000)

Consolidated Retained Earnings, 12/31/18..........$508600

PARTIAL EQUITY METHOD = 518600

INITIAL VALUE METHOD = 518600

Consolidated retained earnings are the same regardless of the method in use: the beginning balance plus the income of the parent less the dividends of the parent plus the income of the subsidiary less amortization expense. Thus, consolidated retained earnings on December 31, 2018 are $518600

Part B

Investment in Rambis—equity method

Rambis fair value 1/1/17.............................................$63800

Rambis income 2017................................................29500

Rambis dividends 2017.............................................(5,000)

Herbert’s 2017 excess fair over book value amortization (20000)

Investment account balance 1/1/18..................................$642500

Investment in Rambis—partial equity method

Rambis fair value 1/1/17...................................................$638000

Rambis income 2017.......................................................29500

Rambis dividends 2017...................................................(5,000)

Investment account balance 1/1/18..............................$662500

Investment in Rambis—Initial value method

Rambis fair value 1/1/17.............................................$638000

Investment account balance 1/1/18..................................$638000

Part C

ENTRY *C

EQUITY METHOD

No entry is needed to convert the past figures to the equity method since that method has already been applied.

Partial equity method

662500-638000 = 24500

Retained Earnings BOY Dr. 24500

Investment in Rambis Company Cr. 24500

Initial value method

642500-638000

Investment in Rambis Company Dr. 4500

Retained Earnings-BOY Cr. 4500