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In: Accounting

11) Harry Inc. acquired all of the outstanding common stock of Rose Company on January 1,...

11) Harry Inc. acquired all of the outstanding common stock of Rose Company on January 1, 2020. Annual amortization of $25,000 resulted from this transaction. On the date of the acquisition, Harry reported retained earnings of $550,000 while Rose reported a $260,000 balance for retained earnings. Harry reported net income of $105,000 in 2020 and $75,000 in 2021, and paid dividends of $20,000 each year. Rose reported net income of $28,000 in 2020 and $39,000 in 2021, and paid dividends of $11,000 each year.

Required: If the parent’s net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2021?


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Expert Solution

As the Given Information,

On the date of Acquisition of outstanding common stock of Rose Company i.e, january 1, 2020. Harry Reported Retained earning of $ 550,000 while Rose Reported a $ 260,000 balance for retained earnings.

Harry Inc. reported Net Income of $ 105,000 in 2020 and $ 75,000 in 2021.

Paid the Dividend of $ 20,000 each Year.

Rose Company Reported Net Income of $ 28,000 in 2020 and $39,000 in 2021.

Paid dividends of $ 11,000 each Year.

REQUIRED: If the parent's income reflected use of the initial value method, calculate consolidated retained earning on december 31, 2021,

Retained Earnings (RE) are the portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business. Normally, these funds are used for working capital and fixed asset purchases (capital expenditures) or allotted for paying off debt obligations.

The purpose of retaining these earnings can be varied and includes buying new equipment and machines, spending on research and development, or other activities that could potentially generate growth for the company. This reinvestment into the company aims to achieve even more earnings in the future.

EQUATION

Retained Earning = Begining period Retained Earning + Net Income /Loss - Cash Dividend - Stock Dividend

Begining period Retained Earning

At the end of each accounting period, retained earnings are reported on the balance sheet as the accumulated income from the prior year (including the current year’s income), minus dividends paid to shareholders. In the next accounting cycle, the RE ending balance from the previous accounting period will now become the retained earnings beginning balance.

  COMPUTATION

RETAINED EARNING AS ON DECEMBER 31,2021

HARRY INC ROSE COMPANY

Retained earning $ 635,000 $ 277,000

(+) Net Income $ 75,000 $ 39,000

(-) Dividend Paid $ 20,000 $ 11,000

RETAINED EARNING $ 690,000 $ 305,000

Consolidated Retained Earning of Harry Inc And Rose Company on December 31,2021 as follows,

  = Retained Earning of Harry Inc. + Retained Earning of Rose Company

= $ 690,000 + $ 305,000

= $ 995,000

Working Notes:

Computation of Retained Earning as on December 31, 2020 as Begining Retained Earning of December 31,2021,

COMPUTATION

HARRY INC ROSE COMPANY

Retained Earning for the Begining $ 550,000 $ 260,000

(+) Net Income $ 105,000 $ 28,000

(-) Dividend Paid $ 20,000 $ 11,000

Retained Earning $ 635,000 $ 277,000


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