Question

In: Accounting

Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $663,000 cash. Immediately after...

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 )

  

  1. What are the December 31, 2021, Investment Income and Investment in Clay account balances assuming Adams uses the:

  • Equity method.
  • Initial value method.
  1. What is the amount of Consolidated Expenses in its December 31, 2021, consolidated income statement under each of the following methods?

  2. What is the amount of Consolidated Equipment in its December 31, 2021, consolidated balance sheet under each of the following methods?

  3. What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

  • Equity value method.
  • Initial value method.
  1. 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?

  2. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

  3. What is consolidated net income for 2021?

Solutions

Expert Solution

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


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