Question

Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2014, for $574,000 in cash. Annual excess amortization of $12,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $400,000, and Rambis reported a $200,000 balance. Herbert reported internal net income of $40,000 in 2014 and $50,000 in 2015 and declared $10,000 in dividends each year. Rambis reported net income of $20,000 in 2014 and $30,000 in 2015 and declared $5,000 in dividends each year.

a.Assume that Herbert’s internal net income figures above do not include any income from the subsidiary.

•If the parent uses the equity method, what is the amount reported as consolidated retained earnings on December 31, 2014?

•Would the amount of consolidated retained earnings change if the parent had applied either the initial value or partial equity method for internal accounting purposes?

b.Under each of the following situations, what is the Investment in Rambis account balance on Herbert’s books on January 1, 2015?

•The parent uses the equity method.

•The parent uses the partial equity method.

•The parent uses the initial value method.

c.Under each of the following situations, what is Entry *C on a 2015 consolidation worksheet?

•The parent uses the equity method.

•The parent uses the partial equity method.

•The parent uses the initial value method.

Answer 1

a. (1) Consolidated Retained Earnings: EQUITY METHOD

Herbert balance in 2014	$400000
Herbert Net Income in 2014	40000
Herbert’s Dividend in 2014	(10000)
Rambis Income in 2014	20000
Annual Amortization 2014	(12000)
Consolidated Retained Earnings as on December 31, 2014	$438000

(2) The amount of Consolidated Retained earnings will remain same irrespective of the method used for calculating it.

b. (1) Investment in Rambis account: EQUITY METHOD

Rambis Company’s outstanding stock on Jan 1, 2014 (Fair Value)	$574000
Rambis Income in 2014	20000
Rambis Dividend in 2014	(5000)
Herbert’s 2014 annual excess amortization	(12000)
Investment in Rambis account as on Jan 1, 2015	$577000

(2) Investment in Rambis account: PARTIAL EQUITY METHOD

Rambis Company’s outstanding stock on Jan 1, 2014 (Fair Value)	$574000
Rambis Income in 2014	20000
Rambis Dividend in 2014	(5000)
Investment in Rambis account as on Jan 1, 2015	$589000

(3) Investment in Rambis account: PARTIAL EQUITY METHOD

Rambis Company’s outstanding stock on Jan 1, 2014 (Fair Value)	$574000
Investment in Rambis account as on Jan 1, 2015	$574000

c. (1) Entry *C: EQUITY METHOD

If Herbet (Parent Company) uses Equity method no Journal Entry is required as on January 1, 2015.

(2) Entry *C: PARTIAL EQUITY METHOD

	Debit	Credit
Retained Earnings as on Jan1, 2015 (589000-577000)	$12000
Investment in Rambis		$12000

(3) Entry *C: INITIAL VALUE METHOD

	Debit	Credit
Investment in Rambis Company (574000-577000)	$3000
Retained Earnings		$3000