Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2016, for $586,000 cash. Greenburg’s accounting records showed net assets on that date of $440,000, although equipment with a 10-year life was undervalued on the records by $56,500. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $105,000 and $137,500 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 $ (1,164,000 ) $ (620,000 ) Cost of goods sold 145,500 155,000 Depreciation expense 358,000 440,000 Investment income (20,000 ) 0 Net income $ (680,500 ) $ (25,000 ) Retained earnings, 1/1/18 $ (1,160,000 ) $ (418,000 ) Net income (680,500 ) (25,000 ) Dividends declared 120,000 20,000 Retained earnings, 12/31/18 $ (1,720,500 ) $ (423,000 ) Current assets $ 373,000 $ 194,000 Investment in subsidiary 586,000 0 Equipment (net) 1,082,000 676,000 Buildings (net) 964,000 594,000 Land 626,000 140,000 Total assets $ 3,631,000 $ 1,604,000 Liabilities $ (1,010,500 ) $ (881,000 ) Common stock (900,000 ) (300,000 ) Retained earnings (1,720,500 ) (423,000 ) Total liabilities and equity $ (3,631,000 ) $ (1,604,000 )

(a) Determine the December 31, 2018, consolidated balance for each of the following accounts: Depreciation Expense Buildings Dividends Declared Goodwill Revenues Common Stock Equipment

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

(e) 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

Part a.

Depreciation expense will be computed as follows: -

= undervalued amount/ useful life

= $56,500/10

= $5,650

please find below table useful to compute other items: -

Part b.

As you can see the method adopted by parent company does not create any hindrance in calculating above values. only dividend is zero due to elimination entry.

Part c.

Acquisition take place in 2016 and you can see in 2018 the amount showing in the balance sheet remained same. This clearly states that initial value method is used for internal reporting.

Part d.

investment income in case of equity method will be: -

Net income in 2017 = $137,500

less: - Depreciation amortized = ($56,500)

Net income = $81,000

but in case of partial equity method the net income will be $137,500