Question

Problem 3-15 (LO 3-3, 3-4)

Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2017, by issuing 11,700 shares of $10 par value common stock. Haynes’s shares had a $15 per share fair value. On that date, Turner reported a net book value of $134,050. However, its equipment (with a five-year remaining life) was undervalued by $7,550 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $33,900, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years.

The following balances come from the individual accounting records of these two companies as of December 31, 2017:

	Haynes			Turner
Revenues	$	(730,000	)	$	(240,000	)
Expenses		493,000			125,000
Investment income		Not given			0
Dividends declared		120,000			50,000

The following balances come from the individual accounting records of these two companies as of December 31, 2018:

	Haynes			Turner
Revenues	$	(913,000	)	$	(310,000	)
Expenses		519,300			162,100
Investment income		Not given			0
Dividends declared		140,000			30,000
Equipment		572,000			383,000

1. a. What balance does Haynes’s Investment in Turner account show on December 31, 2018, when the equity method is applied?

2. b. What is the consolidated net income for the year ending December 31, 2018?

3. c-1. What is the consolidated equipment balance as of December 31, 2018?

4. c-2. Would this answer be affected by the investment method applied by the parent?

5. d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.

Answer 1

a. What balance does Haynes’s Investment in Turner account show on December 31, 2018, when the equity method is applied?

Particulars	Amount	Remarks
Shares issued on January 1, 2017 for acquisition	$1,75,500	(number of shares*fair value on issue=11700*15)
Add: Net income of Turner in 2017	$1,15,000	i.e. revenue less expense=(240,000-125,000)
Less: Dividend received from Turner	-$50,000
Less: Additional depreciation of undervalued portion of equipment	-$1,510	(7550/5)
Less: Amortisation of customer list	-$3,390	(33900/10)
	$2,35,600
Add: Net income of Turner in 2018	$1,47,900	(i.e. revenue less expense=310,000-162,100)
Less: Dividend received from Turner	-$30,000
Less: Additional depreciation of undervalued portion of equipment	-$1,510	(7550/5)
Less: Amortisation of customer list	-$3,390	(33900/10)
Investment in Turner on December 31, 2018	$3,48,600

b. What is the consolidated net income for the year ending December 31, 2018?

Particulars	Amount	Remarks
Net income of Haynes in 2018	$3,93,700	(i.e. revenue less expense=913000-519300)
Add: Net income of Turner in 2018	$1,47,900	(i.e. revenue less expense=310,000-162,100)
Less: Additional depreciation of undervalued portion of equipment	-$1,510	(7550/5)
Less: Amortisation of customer list	-$3,390	(33900/10)
	$5,36,700

c-1. What is the consolidated equipment balance as of December 31, 2018?

Particulars	Amount	Remarks
Equipment balance of Haynes in 2018	$5,72,000	given in question
Add: Equipment balance of Turner in 2018	$3,83,000	given in question
Add: Undervalued portion of equipment	$7,550
Less: Additional depreciation of undervalued portion of equipment
-2017	-$1,510	(7550/5)
-2018	-$1,510	(7550/5)
Consolidated equipment balance as of December 31, 2018	$9,59,530

c-2. Would this answer be affected by the investment method applied by the parent?

Answer: The answer would not be affected

d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.

Initial value

General Journal	Debit	Credit
Investment in Turner	$60,100
To Retained earnings		$60,100
(Being adjustment entry passed)

Particulars	Amount
Net income of Turner in 2017	-$1,15,000
Dividend received from Turner	$50,000
Less: Additional depreciation of undervalued portion of equipment	$1,510
Less: Amortisation of customer list	$3,390
	-$60,100

Partial equity

General Journal	Debit	Credit
Retained earnings	$4,900		(1510+3390)
To Investment in Turner		$4,900
(Being adjustment entry passed)

Equity method

No further adjustment entry would be required as the answer would be same as mentioned in 'a-c'.