Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, for $595,000 in cash. Annual excess amortization of $16,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $402,000, and Rambis reported a $229,000 balance. Herbert reported internal net income of $51,000 in 2017 and $64,500 in 2018 and declared $10,000 in dividends each year. Rambis reported net income of $24,500 in 2017 and $38,000 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?

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.

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.

Answer 1

a.)	Consolidated retained earnings on December 31, 2018: Equity Method:-
	Particulars	Amount in $
	Herbert (Partial) Balance 01/01/2017	402,000
	Herbert Income-2017	51,000
	Herbert Dividends -2017	-10,000
	Rambis Income-2017 ( not included in parent Income )	24,500
	Amotization-2017	-16,000
	Herbert Income-2018	64,500
	Herbert Dividends -2018	-10,000
	Rambis Income-2018	38,000
	Amotization-2017	-16,000
	Consolidated Retained earnings on December 31, 2018	528,000
	Partial Equity & Initial Value Method:
	Consolidated retained earnings will be same regarless of the method use. The beginning balance Plus Income less dividend of the parent plus income of the subsidiary less amortization expense . Thus december 31,2018 consolidated retained earnings will be $ 528,000 as computed above.
b.)	Investment in Rambis account balance on Herbert’s books on January 1, 2018
	Equity Method:
	Particulars	Amount in $
	Initial Investment on 01/01/2017	595,000
	Add: Rambis Income-2017	24,500
	Less: Dividend from Rambis -2017	5,000
	Less: Annual Excess amortization	16,000
	Investment account balance 01/01/2018	598,500
	Partial Equity Method:
	Particulars	Amount in $
	Initial Investment on 01/01/2017	595,000
	Add: Rambis Income-2017	24,500
	Less: Dividend from Rambis -2017	5,000
	Investment account balance 01/01/2018	614,500
	Initial Value Method:
	Particulars	Amount in $
	Initial Investment on 01/01/2017	595,000
	Investment account balance 01/01/2018	595,000
c.)	*C on a 2018 consolidation worksheet
	Equity Method:
	No Entry is needed to convert the past figures to the equity method since the method has already being applied.
	Partial Equity Method:
	Account Titles	Debit	Credit
	Retained earnings 01/01/2018 ( Herbert )	16,000
	Investment in Rambis		16,000
	Initial Value Method:
	Account Titles	Debit	Credit
	Investment in Rambis	3,500
	Retained earnings 01/01/2018 ( Herbert )		3,500
	( 24,500 - 16,000 - 5,000 )