Question

oxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2019, for $586,000 cash. Greenburg’s accounting records showed net assets on that date of $440,000, although equipment with a 10-year remaining life was undervalued on the records by $56,500. Any recognized goodwill is considered to have an indefinite life.

Greenburg reports net income in 2019 of $105,000 and $137,500 in 2020. The subsidiary declared dividends of $20,000 in each of these two years.

Account balances for the year ending December 31, 2021, follow. Credit balances are indicated by parentheses.

	Foxx				Greenburg
Revenues	$	(1,164,000	)		$	(620,000	)
Cost of goods sold		145,500				155,000
Depreciation expense		358,000				440,000
Investment income		(20,000	)			0
Net income	$	(680,500	)		$	(25,000	)
Retained earnings, 1/1/21	$	(1,160,000	)		$	(342,500	)
Net income		(680,500	)			(25,000	)
Dividends declared		120,000				20,000
Retained earnings, 12/31/21	$	(1,720,500	)		$	(347,500	)
Current assets	$	373,000			$	194,000
Investment in subsidiary		586,000				0
Equipment (net)		1,082,000				676,000
Buildings (net)		964,000				594,000
Land		626,000				140,000
Total assets	$	3,631,000			$	1,604,000
Liabilities	$	(1,010,500	)		$	(956,500	)
Common stock		(900,000	)			(300,000	)
Retained earnings		(1,720,500	)			(347,500	)
Total liabilities and equity	$	(3,631,000	)		$	(1,604,000	)

1. Determine the December 31, 2021, consolidated balance for each of the following accounts:

Depreciation Expense	Buildings
Dividends Declared	Goodwill
Revenues	Common Stock
Equipment

1. How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?

2. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

3. Determine parent's investment income for 2021 under partial equity method and equity method.

4. What would be Foxx’s balance for retained earnings as of January 1, 2021, if each of the following methods had been in use?

• Initial value method.
• Partial equity method.
• Equity method.

Answer 1

1. Consolidated balances as on Dec 31st 2021

Purchase price $5,86,000

Book value. $4,40,000

Price in excess of BV $1,46,000

Allocation of undervalued of equipment based on useful life $56,500/10 = $5,650

Goodwill = $146000-$56,500 = $89,500 which has indefinite life.

Total Annual excess amortizations = $5,650

Particulars	consolidated balances	Calculations
Depreciation	8,03,650	$3,58,000+4,40,000+$5,650
Dividend	1,20,000	BV of Foxx
Revenue	17,84,000	$11,64,000+$6,20,000
Equipment	17,97,550	$10,82,000+$6,76,000+$56,500-$(5650*3)
Building	15,58,000	$9,64,000+$5,94,000
Goodwill	89,500	Calculated above
Common stock	9,00,000	Book value of foxx

2. The parent company choice of an accounting method for it's investment doesn't in anyway affect the balances computed above in requirement (a)

3. Parent company is using Initial Value method for internal reporting purpose. In this method, Investment account remains at initial value $5,86,000. Dividend received decrease investment account.

4.parents investment income under partial equity method and equity method

Partial Equity method = Net income of Greenburg=$25,000

Equity method =Net operating income - Depreciation = $25,000-$5,650 =$19,350

5.Foxx balance of retained earnings as of Jan 1,2021 under

Methods	Retained Earnings	Calculations
Initial value method	$11,60,000	Beginning RE of Foxx
Partial equity method	$13,62,500	Beg. RE+NI of G 2019+NI of G for2020- dividend =$11,60,000+$1,05,000+$1,37,500-(20,000*2)
Equity method	$13,51,200	$11,60,000+$1,05,000+$1,37,500-$40,000-$5,650-$5,650