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Problem A - SHOW CALCULATIONS Pattern Corporation acquired all of Science Company's outstanding stock on January...

Problem A - SHOW CALCULATIONS
Pattern Corporation acquired all of Science Company's outstanding stock on January 1, 2016 for $600,000 cash. Science Company's
accounting records showed net assets on that date of $470,000 although equipment with a 10-year remaining life was undervalued
on the records by $90,000. Any recognized goodwill is considered to have an indefinite life. Science Company reports net income
in 2016 of $90,000 and $100,000 in 2017. The subsidiary declared dividends of $20,000 in each of these two years.
The trial balances for each company for the year ending December 31, 2018 are below:
Unconsolidated       Entries
     Pattern   Science    C   S A   I D    E Consolidated
Current assets          300,000      100,000   
Equipment          900,000      600,000
Building          800,000      400,000
Land          600,000      100,000
Goodwill   
Invest in sub          600,000                     203,000
Liabilities        (900,000)    (500,000)
Common Stock        (900,000)    (300,000)
Dividends          120,000         20,000
Retained Earnings 1/1/18    (1,100,000)    (320,000)    (132,000)
Revenues        (800,000)    (500,000)
CGS          100,000      150,000
Depreciation          300,000      250,000
Investment Inc          (20,000)                 -   (71,000)
Totals (should be zero in each column)                    -                   -                   -                  -                  -                 -                -                -                       -  
a.  Complete the consolidating schedule above to consolidate the trial balances. Note that the first entry "C" has already been completed for you.
b.  How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?
c.  Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
d.  If the parent company had used a different method of accounting for this investment, how could that method have been identified?
e.  What would be Pattern'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

Solutions

Expert Solution

Unconsolidated

      Entries

     Pattern

  Science

   C

  S

A

  I

D

   E

Consolidated

Current assets

300000

100000

400000

Equipment

900000

600000

72000

(9000)

1563000

Building

800000

400000

1200000

Land

600000

100000

700000

Goodwill

40000

40000

Invest in sub

600000

132000

(620000)

(112000)

(20000)

20000

0

Liabilities

(900000)

(500000)

(1400000)

Common Stock

(900000)

(300000)

300000

(900000)

Dividends

120000

20000

(20000)

120000

Retained Earnings 1/1/18

(1100000)

(320000)

(132000)

(1552000)

Revenues

(800000)

(500000)

(1300000)

CGS

100000

150000

250000

Depreciation

300000

250000

9000

559000

Investment Inc

(20000)

20000

0

Depreciation expense = 300000+250000+(90000/10)=$559000

Depreciation expense =$559000

Dividends declared = book value of Pattern = 120000

Revenues = 800000+500000=$1300000

Equipment= 900000+600000+90000-(90000/10*3) = 1563000

Buildings= 800000+400000=$120000

Goodwill= 600000-470000-90000=40000

Common stock = book value of Pattern = 900000

Part B

No, doesn't affect consolidated totals but only internal reporting of parent.

The parent's choice for accounting methods for its investment does not affect the consolidated balances of depreciation, dividends declared, equipment, revenue, common stock, goodwill, buildings, revenues.

Part C

Initial value method

Currently, the parent company is currently using the initial value method for reporting. The parent's investment investment in subsidiary is equal to $600000 which is its original cost. Moreover investment income is equal to dividends declared by subsidiary.

Part D

The utilization of partial equity method would have indicated the investment income account at only an equity accrual of $132,000. The utilization of equity method would have indicated the investment income account at both the equity accrual of $132,000 and excess amortizations of $9,000 for a balance of $123000

Part E

Retained earnings

Initial value method

$1100000

Partial equity method

$1250000

Equity method

$1232000

Initial value method = $1190000

Partial equity method = 1100000+90000+100000-(20000*2) = $1250000

Equity method = 1100000+90000+100000-(20000*2)-(90000/10*2)

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ekkarill92 answered 2 years ago
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