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Case 4: (12.5 marks) Objective: Understand that a parent's internal accounting method for its subsidiary investments has no effect on the consolidated financial statement Adams,

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Case 4: (12.5 marks) Objective: Understand that a parent's internal accounting method for its subsidiary investments has no effect on the consolidated financial statement Adams, Inc., acquires Clay Corporation on January 1, 2017, 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. Adams Clay Current assets $300.000 $220.000 Investment in Clay 510,000 Equipment 600,000 390.000 Liabilities (200,000) (160 000) Common stock (350,000) (150.090) Retained earnings, 1/1/17 (860,000) (300,000) In 2017, Clay earns a net income of $55,000 and declares and pays a $5,000 cash dividend. In 2017. 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 2018, selected account balances for the two companies are as follows: Adam: Clay Revenues $ (400,000 )S(240,000) Expenses 290_000 180,000 Investment income Not given Retained earnings, 1/1/15 Not given (350.000) Dividends declared 3,000 Common stock (350,000) (150,000) Current assets 540_000 262.000 Investment in Clay Not given Equipment 520.000 420.000 Liabilities (152,090) (130.000)

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