Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2020, for $600,000 in cash. Annual excess amortization of $13,900 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $445,000, and Rambis reported a $251,000 balance. Herbert reported an internal net income of $42,000 in 2020 and $56,100 in 2021 and declared $10,000 in dividends each year. Rambis reported a net income of $24,200 in 2020 and $38,300 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

a)

i) Computation consolidated retained earnings on December 31, 2021, If the parent uses the equity method:

Particulars	Amount
Herbert's reported retained earnings on the date of takeover i.e., on 1st Jan 2020	$ 445,000.00
Herbert's reported net internal income for the year 2020	$   42,000.00
Dividend for the year 2020 (subsidiary dividend to be eliminated since it's intercompany)	$ -10,000.00
Rambis's reported net income for the year 2020	$   24,200.00
Annual amortization for the year 2020 (resulted from takeover)	$ -13,900.00
Herbert's reported net internal income for the year 2021	$   56,100.00
Dividend for the year 2021 (subsidiary dividend to be eliminated since it's intercompany)	$ -10,000.00
Rambis's reported net income for the year 2021	$   38,300.00
Annual amortization for the year 2021 (resulted from takeover)	$ -13,900.00
Consolidated retained earnings as on Dec 31st, 2021	$ 557,800.00

**The formula used to find consolidated retained earnings is Opening balance of retained earnings of the parent + income of the parent - dividend of the parent + subsidiary's income - amortization expenses

ii) Computation consolidated retained earnings on December 31, 2021, If the parent uses either the partial equity method or initial value method:

The procedure or formula to arrive at the consolidated retained earnings won't change even if the organization chooses partial equity or initial value method in spite of the equity method. There won't any change whatever the method is chosen.

So, Consolidate retained earnings in either of the methods = $ 557,800.00

b) Computation of investment in Rambis account balance on Herbert’s books on January 1, 2021, under various scenarios:

i) If the parent uses the equity method:

Particulars	Amount
Value of acquisition as on 1st Jan 2020 (Fair value as given)	$   600,000.00
Rambis's reported net income for the year 2020	$     24,200.00
Dividend declared by Rambis for the year 2020	$      -5,000.00
Herbert's amortization for the year 2020	$    -13,900.00
Investment in Rambis account balance on Herbert’s books on January 1, 2021	$ 605,300.00

ii) If the parent uses the partial equity method:

Particulars	Amount
Value of acquisition as on 1st Jan 2020 (Fair value as given)	$   600,000.00
Rambis's reported net income for the year 2020	$     24,200.00
Dividend declared by Rambis for the year 2020	$      -5,000.00
Investment in Rambis account balance on Herbert’s books on January 1, 2021	$ 619,200.00

iii) If the parent uses the initial value method:

Particulars	Amount
Value of acquisition as on 1st Jan 2020 (Fair value as given)	$   600,000.00
Investment in Rambis account balance on Herbert’s books on January 1, 2021	$ 600,000.00

c) Entry *C on a 2021 consolidation worksheet under different scenarios:

i) If the parent uses the equity method:

Since all the past figures for the year, 2020 were considered and the method was applied, there is no need to record any worksheet *C entry in the 2021 consolidation worksheet.

ii) If the parent uses the partial equity method:

The amortization expense amount of $13,900 should be recorded through a worksheet *C entry since the amount belongs to the year 2020 is being omitted in the computation of investment in the Rambis account as on 1st Jan 2021.

Date	Account	Debit	Credit
	Retained earnings A/c	$ 13,900.00
	Investment in Rambis A/c		$ 13,900.00
	(To record the omitted amortization expense)

iii) If the parent uses the initial value method:

The amortization expense amount of $13,900 for the year 2020, The amount dividend declared by Rambis for the year 2020 which equals to $5,000 and Rambis's reported net income for the year 2020 which amounts to $24,200 were omitted and the net impact of such omission should be recorded through a worksheet *C entry.

Net impact = Rambis's reported net income - Dividend declared by Rambis - The amortization expense amount = $24,200 - $5,000 - $13,900 = $5,300

Date	Account	Debit	Credit
	Investment in Rambis A/c	$   5,300.00
	Retained earnings A/c		$   5,300.00
	(To record the omitted income, dividend and amortization expenses)