Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2013, for $600,000 cash. Greenburg’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.

Greenburg reports net income in 2013 of $90,000 and $100,000 in 2014. The subsidiary declared dividends of $20,000 in each of these two years.

Financial figures for the year ending December 31, 2015, follow. Credit balances are indicated by parentheses.

	Foxx	Greenburg
Revenues? . . . . . . . . . . . . . . . . . . . . .	$   (800,000)	$  (600,000)
Cost of goods sold? . . . . . . . . . . . . . .	100,000	150,000
Depreciation expense . . . . . . . . . . . .	300,000	350,000
Investment income . . . . . . . . . . . . . .	(20,000)	–0–
Net income? . . . . . . . . . . . . . . . . .	$   (420,000)	$  (100,000)
Retained earnings, 1/1/15 . . . . . . . . .	$(1,100,000)	$  (320,000)
Net income . . . . . . . . . . . . . . . . . . . .	(420,000)	(100,000)
Dividends declared . . . . . . . . . . . . . .	120,000	20,000
Retained earnings, 12/31/15? . . . .	$(1,400,000)	$  (400,000)
Current assets . . . . . . . . . . . . . . . . . .	$    300,000	$   100,000
Investment in subsidiary  . . . . . . . . .	600,000	–0–
Equipment (net) . . . . . . . . . . . . . . . .	900,000	600,000
Buildings (net) . . . . . . . . . . . . . . . . .	800,000	400,000
Land . . . . . . . . . . . . . . . . . . . . . . . . .	600,000	100,000
Total assets? . . . . . . . . . . . . . . . . .	$ 3,200,000	$ 1,200,000
Liabilities . . . . . . . . . . . . . . . . . . . . .	$  (900,000)	$  (500,000)
Common stock . . . . . . . . . . . . . . . . .	(900,000)	(300,000)
Retained earnings . . . . . . . . . . . . . . .	(1,400,000)	(400,000)
Total liabilities and equity? . . . . . . . .	$(3,200,000)	$(1,200,000)

a.Determine the December 31,2015, 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.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 Foxx’s balance for retained earnings as of January 1, 2015, if each of the following methods had been in use?

•Initial value method.

•Partial equity method.

•Equity method.

Answer 1

PART-1)

Depreciation Expense	659,000
Dividends Declared	120,000
Revenues	1,400,000
Equipment	1,563,000
Buildings	1,200,000
Goodwill	40,000
Common stock	900,000

Working:

??Consideration transferred	600,000 ??
??Book value (as provided)	(470,000)??
??Fair value in excess of book value	130,000 ??

??Fair value in excess of book value	130,000 ?
???Allocation to equipment based on ?difference in fair and book value	90,000	10 yrs. ????
??Goodwill	40,000 ?	?indefinite ?	0 ??????
?????Total			9,000 ??????

Consolidated balances

??

Depreciation expense = $659,000 (book values plus $9,000 excess depreciation)

??

Dividend paid : $120,000 (only parent balance. Subsidiary's dividends are eliminated as intra-entity transfer)

??

Revenues: $1,400,000 (plus book values)

??

Equipment: $1,563,000 (plus book values: $90,000 allocation minus three years of excess depreciation [$27,000])

??

Buildings : $1,200,000 (plus book values)

??

Goodwill : $40,000 (original residual allocation)

??

Common stock : $900,000 (only parent balance )

?

PART-2) No, would not affect consolidated totals however only internal reporting of parent

PART-3) Initial vaue method of accounting for this subsidiary is the parent actually using for the purposes of internal reporting

PART-4)

Partial equity method	1,00,000
Equity method	91,000

Working:

When the partial equity method had been applied, the investment income account would have reflected an equity accrual of $100,000. If the equity method had been utilized, the Investment Income account would have included the equity accrual of $100,000 as well as excess amortizations of $9,000 for a balance of $91,000

?

PART-5)

Initial value method	1,100,000
Partial equity method	1,250,000
Equity method	1,232,000

Working:

Partial equity method

??Foxx’s balance? (initial value method)	1,100,000 ?
Net equity accrual for Greenburg (=90,000 - 20,000)	70,000 ?
Net equity accrual for Greenburg (=100,000 - 20,000)	80,000 ?
??Foxx’s retained earnings	1,250,000

Equity method:

??Foxx’s balance? (initial value method)	1,100,000 ?
Net equity accrual for Greenburg (=90,000 - 20,000)	70,000 ?
Excess fair over book value amortization	(9,000)?
Net equity accrual for Greenburg (=100,000 - 20,000)	80,000 ?
Excess fair over book value amortization	(9,000)?
??Foxx’s retained earnings	1,232,000 ?