7 Problem 3-31 (Algo) (LO 3-1, 3-3a, 3-3b, 3-4) On January 1, 2020, Pinnacle Corporation exchanged $3,711,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: 12 points Cash Accounts receivable Inventory Buildings (net) Licensing agreements Total assets $ 296,000 312,000 377,000 2,030,000 3,275,000 $ 6,290,000 Accounts payable $ 435,000 Long-term debt 2,805,000 Common stock 1,500,000 Retained earnings 1,550,000 Total liabilities and equity $ 6,290,000 eBook Print Pinnacle prepared the following fair-value allocation: References $3,711,000 3,050,000 $ 661,000 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 338,000 (106,000) 232,000 $ 429,000 At the acquisition date, Strata's buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata's accounts payable included an $97,000 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata. The separate financial statements for the two companies for the year ending December 31, 2021, follow. Credit balances are indicated by parentheses. Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/21 Net income Dividends declared Retained Earnings 12/31/21 Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/21 Total Liabilities and Owner's equity Pinnacle Strata $ (7,782,000) $ (3,356,000) 5,010,000 1,840,000 256,000 200,000 616,000 423,000 655,000 (35,000) $ (1,935,000 $ (238,000) $ (5,060,000) $ (1,899,600) (1,935,000) (238,000) 600,000 35,000 $ (6,395,000) $ (2,102,600) $ 294,000 $ 539,600 1,545,000 247,500 985,000 1,710,000 3,711,000 5,880,000 2,208,000 1,965,000 405,000 $ 12,820,000 $ 6,670, 100 $ (415,000) $ (957,500) (3,010,000) (2,110,000) (3,000,000) (1,500,000) (6,395,000) (2,102,600) $(12,820,000) $ (6,670,100) a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2021 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/21. Investment in Strata. c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Accounts Debit Credit Consolidated Totals Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Pinnacle Strata $ (7,782,000) $ (3,356,000) 5,010,000 1,840,000 256,000 200,000 616,000 423,000 655,000 (35,000) $ (1,935,000) $ (238,000) Retained earnings 1/1/21 Net income Dividends declared Retained earnings 12/31/21 (5,060,000) (1,899,600) (1,935,000) (238,000) 600,000 35,000 $ 6,395,000) $ (2,102,600) Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets 294,000 $ 1,545,000 985,000 3,711,000 5,880,000 539,600 247,500 1,710,000 2,208,000 1,965,000 405,000 $ 12,820,000 $ 6,670,100 Accounts payable Long-term debt Common stock - Pinnacle Common stock - Strata Retained earnings 12/31/21 Total Liabilities and Owner's Equity (415,000) (957,500) (3,010,000) (2,110,000) (3,000,000) (1,500,000) (6,395,000) (2,102,600) $(12,820,000) $ (6,670,100) $ 0 $ 0 Complete this question by entering your answers in the tabs below. Required A Required B Required C Compute the following amounts that would appear on Pinnacle's 2021 separate (nonconsolidated) financial reco Pinnacle's investment accounting was based on the equity method. (Input all amounts as positive values.) Amounts 1 Subsidiary income 2 Retained earnings 1/1/21 3 Investment in Strata Complete this question by entering your answers in the tabs below. Required A Required B Required C What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method Complete this question by entering your answers in the tabs below. Required A Required B Required C What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method