Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $922,000 cash. Greenburg’s accounting records showed net assets on that date of $702,000, although equipment with a 10-year life was undervalued on the records by $163,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $132,000 and $113,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years. Account balances for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

	Foxx				Greenburg
Revenues	$	(1,144,000	)		$	(968,000	)
Cost of goods sold		143,000				242,000
Depreciation expense		316,000				357,000
Investment income		(20,000	)			0
Net income	$	(705,000	)		$	(369,000	)
Retained earnings, 1/1/18	$	(1,252,000	)		$	(607,000	)
Net income		(705,000	)			(369,000	)
Dividends declared		120,000				20,000
Retained earnings, 12/31/18	$	(1,837,000	)		$	(956,000	)
Current assets	$	323,000			$	150,000
Investment in subsidiary		922,000				0
Equipment (net)		902,000				796,000
Buildings (net)		812,000				406,000
Land		734,000				128,000
Total assets	$	3,693,000			$	1,480,000
Liabilities	$	(956,000	)		$	(224,000	)
Common stock		(900,000	)			(300,000	)
Retained earnings		(1,837,000	)			(956,000	)
Total liabilities and equity	$	(3,693,000	)		$	(1,480,000	)

1. Determine the December 31, 2018, consolidated balance for each of the following accounts:

Depreciation Expense	Buildings
Dividends Declared	Goodwill
Revenues	Common Stock
Equipment

1. How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?

2. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

3. Determine parent's investment income for 2018 under partial equity method and equity method.

4. What would be Foxx’s balance for retained earnings as of January 1, 2018, if each of the following methods had been in use?

• Initial value method.
• Partial equity method.
• Equity method.

Answer 1

a) Consolidated Balances

Depreciation Expense	689300	(316000+357000+16300)
Dividend Declared	120000
(Subsidiary Balance will be eliminated as inter Company)
Revenue	2112000	(1144000+968000)
Equipment	1812100	(902000+796000+163000-16300*3)
Building	1218000	(812000+406000)
Goodwill	57000
Common Stock	900000
(Subsidiary Balance will be eliminated)

b) No doesn't affect the consolidated total, only for internal reporting purpose.

c) Initial Value Method, as value of investment is shown at 922000.

d) Under Partial Equity Method Investment Income = 100000

Under Equity Method Investment Income = 100000 - 16300 = 83700

e) 1252000, 1457000, 1424400

Explanation:

a)

Consideration Paid	922000
Book Value of Net Assets	702000
Fair Value in Excess of Book Value	220000
Allocation of Excess Fair Value
To Net Assets	163000	(Additional Depreciation = 163000/10)
To Goodwill	57000

e)

Initial Value Method

Balance of Retained Earning on 1/1/18

1252000

Partial Equity Method

Balance of Retained Earning on 1/1/18	1252000
Add : Net Income of Subsidiary
2016 (132000 - 20000)	112000
2017 (113000 - 20000)	93000
Retained Earnings 1/1/18	1457000

Equity Method

Balance of Retained Earning on 1/1/18	1252000
Add : Net Income of Subsidiary
2016 (132000 - 20000)	112000
2017 (113000 - 20000)	93000
Less : Additional Depreciation
(163000/10)*2	32600
Retained Earnings 1/1/18	1424400