Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $693,000 cash. Greenburg’s accounting records showed net assets on that date of $558,000, although equipment with a 10-year life was undervalued on the records by $71,500. Any recognized goodwill is considered to have an indefinite life.

Greenburg reports net income in 2016 of $97,000 and $135,500 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	$	(860,000	)		$	(776,000	)
Cost of goods sold		107,500				194,000
Depreciation expense		348,000				375,000
Investment income		(20,000	)			0
Net income	$	(424,500	)		$	(207,000	)
Retained earnings, 1/1/18	$	(1,218,000	)		$	(335,000	)
Net income		(424,500	)			(207,000	)
Dividends declared		120,000				20,000
Retained earnings, 12/31/18	$	(1,522,500	)		$	(522,000	)
Current assets	$	325,000			$	161,000
Investment in subsidiary		693,000				0
Equipment (net)		1,054,000				634,000
Buildings (net)		826,000				588,000
Land		666,000				145,000
Total assets	$	3,564,000			$	1,528,000
Liabilities	$	(1,141,500	)		$	(706,000	)
Common stock		(900,000	)			(300,000	)
Retained earnings		(1,522,500	)			(522,000	)
Total liabilities and equity	$	(3,564,000	)		$	(1,528,000	)
a. consolidated balances depreciation expense dividencs declard r revenues equipment buildings goodwill common stock b. How does the parents choice of an accounting method for its investment affect the balances computed in requirement (a)? a. yes affects consolidate totals b. no, doesn't affect consolidated totals but only internal reporting of parent c. no, neither affects consolidated totals nor intenal reportin of parent c. Which method of accounting for this subsidiary is the parent actually using for intenal reporting purpses? a. initial value method b. partial equity method c. equity method D&E investment income retained earnings initial value partial equity equity method

Answer 1

Requirement a		Consolidated Balance			Consolidation		Consolidated Balance
			Foxx corpoation	Greenburg	Debit	Credit
		Depreciation	348000	375000	7150		730150
		Dividends declared	120000	20000		20000	120000
		Revenues	-860000	-776000			-1636000
		Equipment	1054000	634000	50050		1738050
		Buildings	826000	588000			1414000
		Goodwill			63500		63500
		Common Stock	-900000	-300000	300000		-900000
Requirement b
		The correct alternative is ( b) i.e It does not affect the consolidated totals but it does affect the internal reporting of parents.
Requirement c
		Correct alternative (a) i.e Initial value method. As parent has reported acquistion cost as Investment in Greenburg(subsidiary)
		It did not change the investment in Greenburg despite the fact of subsidiary reporting net Income in the year 2016, 2017 & 2018
		and paying dividends in the respective years.

Requirement d & e			Investment Income	Retained earning of parent will increase by following amount
		Initial Value	20000	20000
		Partial equity	207000	187000
		Equity method	207000	179850