Question

On January 1, 2017, Pinnacle Corporation exchanged $3,407,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash	$	114,000			Accounts payable	$	396,000
Accounts receivable		298,000			Long-term debt		3,395,000
Inventory		419,000			Common stock		1,500,000
Buildings (net)		2,105,000			Retained earnings		1,125,000
Licensing agreements		3,480,000
	$	6,416,000				$	6,416,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)					$	3,407,000
Carrying amount acquired						2,625,000
Excess fair value					$	782,000
to buildings (undervalued)	$	470,000
to licensing agreements (overvalued)		(115,000	)			355,000
to goodwill (indefinite life)					$	427,000

At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable included an $89,200 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata.

The separate financial statements for the two companies for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

	Pinnacle				Strata
Sales	$	(7,455,000	)		$	(3,526,000	)
Cost of goods sold		4,670,000				1,940,000
Interest expense		342,000				238,000
Depreciation expense		648,000				436,000
Amortization expense						696,000
Dividend income		(40,000	)
Net income	$	(1,835,000	)		$	(216,000	)
Retained earnings 1/1/18	$	(5,320,000	)		$	(1,463,000	)
Net income		(1,835,000	)			(216,000	)
Dividends declared		450,000				40,000
Retained Earnings 12/31/18	$	(6,705,000	)		$	(1,639,000	)
Cash	$	240,500			$	522,000
Accounts receivable		1,640,000				405,000
Inventory		1,175,000				1,125,000
Investment in Strata		3,407,000
Buildings (net)		6,010,000				2,216,000
Licensing agreements						2,088,000
Goodwill		520,000
Total assets	$	12,992,500			$	6,356,000
Accounts payable	$	(307,500	)		$	(752,000	)
Long-term debt		(2,980,000	)			(2,465,000	)
Common stock		(3,000,000	)			(1,500,000	)
Retained earnings 12/31/18		(6,705,000	)			(1,639,000	)
Total Liabilities and OE	$	(12,992,500	)		$	(6,356,000	)

a.Prepare a worksheet to consolidate the financial information for these two companies.

b. Compute the following amounts that would appear on Pinnacle’s 2018 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.

-Subsidiary income.

-Retained earnings, 1/1/18.

-Investment in Strata.

c. What effect does the parent’s internal investment accounting method have on its consolidated financial statements?

a. Prepare a worksheet to consolidate the financial information for these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.)

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PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2018 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales $(7,455,000) $(3,526,000) Cost of goods sold 4,670,000 1,940,000 Interest expense 342,000 238,000 Depreciation expense 648,000 436,000 Amortization expense 696,000 Dividend income (40,000) Net income $(1,835,000) $(216,000) Retained earnings 1/1/18 (5,320,000) (1,463,000) Net income (1,835,000) (216,000) Dividends declared 450,000 40,000 Retained earnings 12/31/18 $(6,705,000) $(1,639,000) Cash $240,500 $522,000 Accounts receivable 1,640,000 405,000 Inventory 1,175,000 1,125,000 Investment in Strata 3,407,000 Buildings (net) 6,010,000 2,216,000 Licensing agreements 2,088,000 Goodwill 520,000 Total assets $12,992,500 $6,356,000 Accounts payable (307,500) (752,000) Long-term debt (2,980,000) (2,465,000) Common stock - Pinnacle (3,000,000) Common stock - Strata (1,500,000) Retained earnings 12/31/18 (6,705,000) (1,639,000) Total Liabilities and Owner's Equity $(12,992,500) $(6,356,000)

b.

Compute the following amounts that would appear on Pinnacle’s 2018 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.

	1 Subsidiary income 2 Retained earnings 1/1/18 3 Investment in Strata

c.

What effect does the parent’s internal investment accounting method have on its consolidated financial statements?

	Effect of parent’s internal investment accounting method

Answer 1