Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $510,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $440,000. Credit balances are indicated by parentheses.

In 2020, Clay earns a net income of $55,000 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:

a. What are the December 31, 2021, Investment Income and Investment in Clay account balances assuming Adams uses the 

• Equity method
• Initial value method.

b. How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2021, consolidated income statement?

c. How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2021, consolidated balance sheet?

d. What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the

• Equity value method.
• Initial value method.

e. What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

f. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

g. What is consolidated net income for 2021?

Transcribed Image Text:

Adams Clay $ 220,000 $ 300,000 510,000 600,000 Current assets Investment in Clay. Equipment -0- 390,000 (160,000) (150,000) (300,000) Liabilities.. (200,000) (350,000) (860,000) Common stock Retained earnings, 1/1/20