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6/28/2020 7. Assignment Print View Award: 12.00 points Problem 3-31 (Algo) (LO 3-1, 3-3a, 3-3b, 3-4) On January 1, 2020, Pinnacle Corporation exchanged $3,424,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash Accounts receivable Inventory Buildings (net) Licensing agreements $ Total assets $ 118,000 313,000 372,000 1,970,000 3,470,000 6,243,000 Accounts payable Long-term debt Common stock Retained earnings Total liabilities and equity $ 378,000 3,135,000 1,500,000 1,230,000 $ 6,243,000 Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) $ $ $ 3,424,500 2,730,000 694,500 $ 250,000 444,500 370,000 (120,000) to goodwill (indefinite life) 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 $85,600 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 (7,178,000) 4,720,000 262,000 656,000 (45,000) (1,585,000) $ Strata (3,725,000) 2,125,000 247,000 432,000 694,000 $ (227,000) (5,235,000) (1,585,000) 500,000 (6,320,000) $ (1,504,000) (227,000) 45,000 (1,686,000) 265,500 1,560,000 1,500,000 3,424,500 5,720,000 $ 372,500 12,842,500 (532,500) (2,990,000) (3,000,000) (6,320,000) (12,842,500) $ 386,000 335,000 1,270,000 2,098,000 2,082,000 $ 6,171,000 $ (885,000) (2,100,000) (1,500,000) (1,686,000) (6,171,000) $ 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? https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=7.&postSubmissionView=13252713819968760&wid=1325271395... 1/3 6/28/2020 Assignment Print View Complete this question by entering your answers in the tabs below. Required A Required B Required C Prepare a worksheet to consolidate the financial information for these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Input all amounts as positive values.) Show less PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Consolidation Entries Accounts Sales Pinnacle Strata $ (7,178,000) Credit Consolidated Totals (3,725,000) $ 10,903,000 4,720,000 2,125,000 6,845,000 Interest expense 262,000 247,000 Depreciation expense 656,000 432,000 Cost of goods sold $ Debit Amortization expense $ (1,585,000) $ Net income (1,585,000) (227,000) 500,000 45,000 $ (6,320,000) $ (1,686,000) $ $ 386,000 265,500 Accounts receivable 1,560,000 335,000 Inventory 1,500,000 1,270,000 Investment in Strata 3,424,500 Buildings (net) 5,720,000 Total assets Accounts payable $ 500,000 $ 6,408,400 651,500 85,600 1,809,400 6,770,000 0 37,000 12,000 48,000 2,046,000 6,171,000 (885,000) (2,100,000) Common stock - Pinnacle (3,000,000) 99,600 1,317,900 5,090,000 3,000,000 Common stock - Strata (1,500,000) (6,320,000) 5,485,000 444,500 (532,500) $ (12,842,500) 1,812,000 1,812,000 372,500 $ 12,842,500 250,000 45,000 2,082,000 (2,990,000) Total Liabilities and Owner's Equity 1,504,000 2,098,000 Long-term debt Retained earnings 12/31/21 $ 250,000 Licensing agreements Goodwill 0 (227,000) (1,504,000) Dividends declared 674,000 45,000 (5,235,000) Cash 24,000 (45,000) Retained earnings 1/1/21 Retained earnings 12/31/21 1,125,000 694,000 Dividend income Net income 509,000 37,000 1,500,000 (1,686,000) $ (6,171,000) Required A 6,408,400 $ 3,977,700 $ Required B 404,000 References https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=7.&postSubmissionView=13252713819968760&wid=1325271395... 2/3 6/28/2020 Assignment Print View Financial Statements Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Problem 3-31 (Algo) (LO 3-1, 3-3a, 3-3b, 34) Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has applied in its internal records the equity method. Difficulty: 3 Hard Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has applied in its internal records the initial value method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements. https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=7.&postSubmissionView=13252713819968760&wid=1325271395... 3/3
