Question
In: Accounting
Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, for $574,000 in...
Herbert, Inc., acquired all of Rambis Company’s outstanding stock on January 1, 2017, 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 2017 and $50,000 in 2018 and declared $10,000 in dividends each year. Rambis reported net income of $20,000 in 2017 and $30,000 in 2018 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, 2018?
What would be the amount of consolidated retained earnings on December 31, 2018, 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, 2018?
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 2018 consolidation worksheet?
The parent uses the equity method.
The parent uses the partial equity method.
The parent uses the initial value method.
Solutions
Expert Solution
| Answer a. | ||
| CONSOLIDATED RETAINED EARNINGS - EQUITY METHOD | ||
| Herbert (parent) balance Jan 1, 2017 | 400,000.00 | |
| Herbert Income 2017 | 40,000.00 | |
| Herbert dividends - 2017 | (10,000.00) | |
| Rambis Income 2017 (not included in parent's income) | 20,000.00 | |
| Amortization - 2017 | (12,000.00) | |
| Herbert Income - 2018 | 50,000.00 | |
| Herbert dividends - 2018 | (10,000.00) | |
| Rambis Income 2018 (not included in parent's income) | 30,000.00 | |
| Amortization - 2018 | (12,000.00) | |
| Consolidated Retained Earnings, Dec 31, 2018 | 496,000.00 | |
| Consolidated Retained Earnings are the same regardless of the method use. | ||
| It will be same in Partial Equity Method and Cost Method. | ||
| Answer b. | ||
| Investment in Rambis – Equity Method | ||
| Cost - Jan 1, 2017 | 574,000.00 | |
| Rambis income 2017 | 20,000.00 | |
| Rambis dividends 2017 | (5,000.00) | |
| Herbert’s 2017 excess cost amortization | (12,000.00) | |
| Investment account balance Jan 1, 2018 | 577,000.00 | |
| Investment in Rambis – Partial Equity Method | ||
| Cost - Jan 1, 2017 | 574,000.00 | |
| Rambis income 2017 | 20,000.00 | |
| Rambis dividends 2017 | (5,000.00) | |
| Investment account balance Jan 1, 2018 | 589,000.00 | |
| Investment in Rambis – Cost Method | ||
| Cost - Jan 1, 2017 | 574,000.00 | |
| Investment account balance Jan 1, 2018 | 574,000.00 | |
| Answer c. | |||
| Journal Entry | |||
| Date | Particulars | Dr. Amt. | Cr. Amt. |
| Equity Method | |||
| 1-Jan-18 | No Entry | ||
| Partial Equity Method | |||
| 1-Jan-18 | Retained Earnings | 12,000.00 | |
| Investment in Rambis | 12,000.00 | ||
| Intial Value Method | |||
| 1-Jan-18 | Investment in Rambis | 3,000.00 | |
| Retained Earnings | 3,000.00 | ||
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stock on January 1, 2017, for $599,000 in cash. Annual excess
amortization of $17,000 results from this transaction. On the date
of the takeover, Herbert reported retained earnings of $486,000,
and Rambis reported a $220,000 balance. Herbert reported internal
net income of $41,000 in 2017 and $55,600 in 2018 and declared
$10,000 in dividends each year. Rambis reported net income of
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net income of $51,000 in 2017 and $64,500 in 2018 and declared
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