Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, for $599,000 in cash. Annual excess amortization of $17,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $486,000, and Rambis reported a $220,000 balance. Herbert reported internal net income of $41,000 in 2017 and $55,600 in 2018 and declared $10,000 in dividends each year. Rambis reported net income of $27,500 in 2017 and $42,100 in 2018 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, 2018?

What would be the amount of consolidated retained earnings on December 31, 2018, if the parent had applied either the initial value or partial equity method for internal accounting purposes?

Consolidated retained earnings (equity method) Consolidated retained earnings (initial value method) Consolidated retained earnings (partial equity method)

b. Under each of the following situations, what is the Investment in Rambis account balance on Herbert’s books on January 1, 2018?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

Investment Equity method Partial equity method Initial value method

c. Under each of the following situations, what is Entry *C on a 2018 consolidation worksheet?

The parent uses the equity method.

The parent uses the partial equity method.

The parent uses the initial value method.

Prepare entry *C if the parent used the equity method.

Date	Accounts	Debit	Credit
January 01, 2018

Prepare entry *C if the parent used the partial equity method.

Date	Accounts	Debit	Credit
January 01, 2018

Prepare entry *C if the parent used the initial value method.

Date	Accounts	Debit	Credit
January 01, 2018

Answer 1

a-1
	Equity method consolidated retained earnings	Amount($)
	Herbert balance as on 1/1/17	$4,86,000.00
	Herbert net income-2017	$41,000.00
	Herbert dividends-2017	$             (10,000)
	Rambis net income-2017	$27,500.00
	Amortization -2017	$(17,000.00)
	Herbert net income-2018	$55,600.00
	Herbert dividends-2018	$             (10,000)
	Rambis net income-2018	$42,100.00
	Amortization -2018	$(17,000.00)
	Consolidated retained earnings on dec-31,2018	$6,18,200.00
a-2
	There is no change in the consolidated retained earnings on dec-31-2018,that is 6,18,200 ,irrespective of the method used.
b)	Equity method:
	Rambis fair value-1/1/2017	$5,99,000.00
	Rambis net income-2017	$27,500.00
	Rambis dividend-2017	$               (5,000)
	Herbert 2017 excess fair value amortization	$(17,000.00)
	investment balance on 1/1/2018	$6,09,500.00
	Partial Equity Method
	Rambis fair value-1/1/2017	$5,99,000.00
	Rambis net income-2017	$27,500.00
	Rambis dividend-2017	$               (5,000)
	investment balance on 1/1/2015	$6,26,500.00
	Initial Value Method
	Rambis fair value-1/1/2017	$5,99,000.00
	investment balance on 1/1/2018	$5,99,000.00
c	Equity Method
	no entry required
	Partial Equity Method
	Accounts and explanations	Debit	Credit
	Retained earnings	$17,000.00
	Investment rambis		$17,000.00
	(To record excess amortization)
	Initial value method:
	net income of rambis-2017	$27,500.00
	Rambis dividends-2017	$(5,000.00)
	Annual excess amortization-2017	$(17,000.00)
	Adjustment	5,500.00
	Accounts and explanations	Debit	Credit
	Investment rambis	$5,500.00
	retained earnings-1/1/2015		$5,500.00
	(To record adjustment)