Question

Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2019, for $666,000 cash. Greenburg’s accounting records showed net assets on that date of $446,000, although equipment with a 10-year remaining life was undervalued on the records by $163,000. Any recognized goodwill is considered to have an indefinite life.

Greenburg reports net income in 2019 of $132,000 and $113,000 in 2020. The subsidiary declared dividends of $20,000 in each of these two years.

Account balances for the year ending December 31, 2021, follow. Credit balances are indicated by parentheses.

	Foxx				Greenburg
Revenues	$	(1,144,000	)		$	(968,000	)
Cost of goods sold		143,000				242,000
Depreciation expense		316,000				357,000
Investment income		(20,000	)			0
Net income	$	(705,000	)		$	(369,000	)
Retained earnings, 1/1/21	$	(1,252,000	)		$	(351,000	)
Net income		(705,000	)			(369,000	)
Dividends declared		120,000				20,000
Retained earnings, 12/31/21	$	(1,837,000	)		$	(700,000	)
Current assets	$	323,000			$	150,000
Investment in subsidiary		666,000				0
Equipment (net)		902,000				796,000
Buildings (net)		812,000				406,000
Land		734,000				128,000
Total assets	$	3,437,000			$	1,480,000
Liabilities	$	(700,000	)		$	(480,000	)
Common stock		(900,000	)			(300,000	)
Retained earnings		(1,837,000	)			(700,000	)
Total liabilities and equity	$	(3,437,000	)		$	(1,480,000	)

1. Determine the December 31, 2021, consolidated balance for each of the following accounts:

Depreciation Expense	Buildings
Dividends Declared	Goodwill
Revenues	Common Stock
Equipment

1. How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?

2. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

3. Determine parent's investment income for 2021 under partial equity method and equity method.

4. What would be Foxx’s balance for retained earnings as of January 1, 2021, if each of the following methods had been in use?

• Initial value method.
• Partial equity method.
• Equity method.

• Determine the December 31, 2021, consolidated balance for each of the following accounts:

  	Consolidated Balances Depreciation expense Dividends declared Revenues Equipment Buildings Goodwill Common stock

Answer 1

(a)

Purchase price	666,000
Book value (given)	(446,000)
Price in excess of book value	220,000
		Life	Annual Excess amortizations
Allocation to equipment based on difference in market value and book value	163000	10	16300
Goodwill	57000	indefinite
Total	$220,000		$16,300

Working Note

• Depreciation expense = book value of Foxx + book value of Greenburg+amortization expense = 316,000+357,000+16,300=$689,300
• Dividends declared = book value of Foxx = 120000
• Revenues = book value of Foxx + book value of Greenburg = 1,144,000+768,000=$1,912,000
• Equipment= book value of Foxx+ book value of Greenburg + excess allocation+ amortization expense(3 years) = 902,000+796,000+163000-(16300*3 years i.e, from 2019 to 2021) = 1,812,100
• Buildings= book value of Foxx + book value of Greenburg = 812,000+406,000=$1,218,000
• Goodwill= purchase price of net assets-book value of net assets - excess allocated to equipment = 666,000-446,000-163000=$57,000
• Common stock = book value of Foxx = $900,000

	Consolidated balances
Depreciation expense	$689,300
Dividends declared	$120,000
revenues	$1,912,000
Equipment	$1,812,100
Buildings	$1,218,000
Goodwill	$57,000
Comon stock	$900,000

(b) How does the parent's choice of an accounting method for its investment affect the balances computed in requirement (a)?

The parent's choice for accounting methods for its investment does not affect the consolidated balances of depreciation, dividends declared, equipment, revenue, common stock, goodwill, buildings, revenues.

It doesn't affect consolidated totals but only internal reporting of parent.

(c) Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?

Initial value method

Currently, the parent company is currently using the initial value method for reporting. The parent's investment investment in subsidiary is equal to $666,000 which is its original cost. Moreover investment income is equal to dividends declared by subsidiary.

(d) Determine parent's investment income for 2021 under partial equity method and equity method.

	Investment Income
Partial Equity method	$369,000
Equity Method	$ 352,700

Partial equity method = net income of Greenburg= 369,000

Equity method = net operating income-depreciation = 369,000-16,300 = 352,700

(e) What would be Foxx’s balance for retained earnings as of January 1, 2021, if each of the following methods had been in use?

• Initial value method.
• Partial equity method.
• Equity method.

	Retained earnings
Initial Value method	$1,252,000
Partial equity method	$1,457,000
Equity method	$1,424,400

Initial value method = Beginning retained earnings of Foxx = $1,252,000

Partial equity method = Beginning retained earnings+ net income 2019 + net income 2020 - dividends = 1,252,000+132,000+113,000-(20000*2) = $1,457,000

Equity method = Beginning retained earnings+ net income 2019 + net income 2020 - dividends - depreciation expense 2019 - depreciation expense 2020 = 1,252,000+132,000+113,000-(20000*2)-16300-16300 = 1,424,400