Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2020, for $617,000 in cash. Annual excess amortization of $13,500 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $430,000, and Rambis reported a $228,000 balance. Herbert reported internal net income of $63,750 in 2020 and $75,850 in 2021 and declared $10,000 in dividends each year. Rambis reported net income of $22,600 in 2020 and $34,700 in 2021 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, 2021?
• What would be the amount of consolidated retained earnings on December 31, 2021, 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, 2021?

• 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 2021 consolidation worksheet?

• The parent uses the equity method.
• The parent uses the partial equity method.
• The parent uses the initial value method.

Answer 1