case-3

Objectives:

Prepare consolidated financial statements subsequent to acquisition when parent has applied the equity method, initial value method and the partial equity method and preparing worksheet entries to consolidate the financial records

Recognize the complexities in preparing consolidated financial reports emerging from the passage of time, Identify the methods available for a parent company to maintain its investment in subsidiary accounts

On January 1, 2018, ALPHA Company acquired all of BETA Company's outstanding common stock for $1,263,000 in cash. As of that date, one of BETA's buildings with a 12-year remaining life was undervalued on its financial records by $108,000. Equipment with a 10-year life was undervalued, but only by $15,000. The book values of all of BETA's other assets and liabilities were equal to their fair values at that time except for an unrecorded licensing agreement with an assessed value of $60,000 and a 20-year remaining useful life. BETA's book value at the acquisition date was $1,080,000. During 2018, BETA reported net income of $150,000 and paid $45,000 in dividends. Earnings were $180,000 in 2019 with $45,000 in dividends distributed by the subsidiary. As of December 31, 2020, the companies reported the following selected balances, which include all revenues and expenses for the year:

Required

1. If ALPHA applies the equity method, what is its investment account balance as of December 31, 2020?

2. If ALPHA applies the initial value method, what is its investment account balance as of December 31, 2020?

3. If ALPHA applies the partial equity method, what is its investment account balance as of December 31, 2020?

4. Regardless of the accounting method in use by ALPHA, what are the consolidated totals as of December 31, 2020, for each of the following accounts?

Buildings

Equipment

Land

Depreciation Expense

Amortization Expense

Revenue

Net Income

Investment in BETA

Dividend paid

Cost of Goods Sold

5. Prepare the worksheet entries required on December 31, 2020, to consolidate the financial records of these two companies. Assume that ALPHA applied the equity method to its investment account.

6. How would the worksheet entries in requirement (d) be altered if ALPHA has used the initial value method?

ALPHA Company BETA Company December 31, 2020 December 31, 2020 Debit Credit Debit Credit Buildings 2,310,000 690.000 Cash and receivables 75,000 135,000 Common stock 1.350,000 600.000 Dividends paid 105,000 15,000 Equipment 420,000 300,000 Cost of goods sold 750,000 180,000 Depreciation expense 150,000 90,000 Inventory 420,000 390.000 Land 495.000 375,000 Liabilities 720,000 390.000 Retained earnings 2,040,000 735,000 Revenues 1,350,000 450,000 Required