In: Accounting
Adams, Inc., acquires Clay Corporation on January 1, 2020, 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.
Adams | Clay | |||||
Current assets | $ | 408,000 | $ | 259,000 | ||
Investment in Clay | 663,000 | 0 | ||||
Equipment | 822,300 | 554,000 | ||||
Liabilities | (211,000 | ) | (225,000 | ) | ||
Common stock | (350,000 | ) | (150,000 | ) | ||
Retained earnings, 1/1/20 | (1,332,300 | ) | (438,000 | ) | ||
In 2020, Clay earns a net income of $50,700 and declares and pays a $5,000 cash dividend. In 2020, 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 2021, selected account balances for the two companies are as follows:
Adams | Clay | |||||
Revenues | $ | (572,000 | ) | $ | (382,000 | ) |
Expenses | 414,700 | 286,500 | ||||
Investment income | Not given | 0 | ||||
Retained earnings, 1/1/21 | Not given | (483,700 | ) | |||
Dividends declared | 0 | 8,000 | ||||
Common stock | (350,000 | ) | (150,000 | ) | ||
Current assets | 712,000 | 305,200 | ||||
Investment in Clay | Not given | 0 | ||||
Equipment | 725,800 | 610,400 | ||||
Liabilities | (144,700 | ) | (192,000 | ) | ||
What are the December 31, 2021, Investment Income and Investment in Clay account balances assuming Adams uses the:
What is the amount of Consolidated Expenses in its December 31, 2021, consolidated income statement under each of the following methods?
What is the amount of Consolidated Equipment in its December 31, 2021, consolidated balance sheet under each of the following methods?
What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:
What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?
Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.
What is consolidated net income for 2021?
Answer:
(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 | ||
Allocation to equipment based on | Remaining life | Annual excess Amortization | |
Fair and book value difference | 45,700 | 5 years | $9,140 |
Goodwill | $29,300 | idefinite | 0 |
Total | $9,140 | ||
Equity Method | |||
Investment income 2021 | |||
Equity accrual (based on Clay's net income) | $55,700 | ||
Amortization (above) | (9,140) | ||
Investment income for 2021 | $46,560 | ||
Investment in Clay' Dec 31.2021 | |||
Consideration transferred for Clay | $663,000 | ||
2020 Equity accrual (Based on Clay's net income) | 50,700 | ||
Excess amortization (above) | (9,140) | ||
Dividends | (5,000) | ||
2021 Equity accrual (Based on Clay's income) | 55,700 | ||
Excess amortizations | (9,140) | ||
Dividends | (8,000) | ||
Total | $738,120 | ||
Initial value method | |||
Investment income 2021 | |||
Dividend income | $8,000 | ||
Investment in Clay Dec 31.2021 | |||
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 + amortization of $9,140) are the same regardless of whether the equity method, the partial value method is applied by Adams
(c). The reported consolidated balances are not affected by the parent's investment in 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 weather the equity method or the initial value method is applied by Adams.
(d). Adams retained earnings - Equity method
Adams retained earnings 1/1/20 | $1,332,300 |
Adams income 2020 | 189,000 |
2020 equity accrual for Clay income | 50,700 |
2020 excess amortization | (9,140) |
Adams retained earnings 1/1/21 | $1,562,860 |
Adams retained earnings initial value method | |
Adams retained earnings 1/1/21 | $1,332,300 |
Adams income 2020 | 189,000 |
2020 dividend income from Clay | 5,000 |
Adams retained earnings 1/1/21 | $1,526,300 |
(e). Equity method : Entry *C is not utilized since parent's retained earnings balance is correct
Initial value method : Entry *C is needed to recognize increase in subsidiary book value ($50,700 income less 5,000 dividends) and amortization ($9,140) for prior year
Investment in Clay ................36,560
Retained earnings, 1/1/21 (Clay).............. 36,560
(f) Consolidated worksheet entry S for 2018
Common stock (Clay).............. 150,000
Retained earnings 1/1/18 (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