Chapter $3$ Exercise $14($revised$)$

Herbert, Inc. acquired all of Rambis Company$$s outstanding stock on January $1,2020$ for $ $574,000$ in cash. Annual excess amortization of $ $12,000$ results from this transaction. On the date of the takeover, Herbert reported retained earnings of $ $400,000,$ and Rambis reported a $ $200,000$ balance. Herbert reported internal income of $ $40,000$ in $2020$ and $ $50,000$ in $2021$ and paid $ $10,000$ in dividends each year. Rambis reported net income of $ $20,000$ in $2020$ and $ $30,000$ in $2021$ and paid $ $5,000$ in dividends each year.

Assume that Herbert$$s internal income figures above do not include any income from the subsidiary. The parent uses the equity method.

A$.$ What is the amount reported as consolidated Retained Earnings on December $31,2020?2020$ journal entries for Herbert Inc.

To record the acquistion transaction

$\frac{1}{1}\frac{?}{20}$

Investment in Rambis Company

Cash

To record receipt of dividend

$12/31/20$ Cash

Investment in Rambis Company

To accrue the subsidiary income

$12/31/20$ Investment in Rambis Company

Equity in Subsidiary Earnings

To recognize amortization on allocations

$12/31/20$ Equity in Subsidiary Earnings

Investment in Rambis Company

Herbert's Internal Income

Add: Equity in Investee Income

Net Income

Retained Earnings $1/1/20$

Add: Net Income

Less: Dividends Paid

Retained Earnings $12/31/20$

Note: Since the equity method is used, Herbert's net income and retained earnings includes the accrual for the

subsidiary's income. So the consolidated retained earnings will be the same as Herbert's retained earnings$2020$ journal entries for Herbert Inc.

To record the acquistion transaction

$\frac{1}{1}\frac{?}{20}$

Investment in Rambis Company

Cash

To record receipt of dividend

$12/31/20$ Cash

Investment in Rambis Company

To accrue the subsidiary income

$12/31/20$ Investment in Rambis Company

Equity in Subsidiary Earnings

To recognize amortization on allocations

$12/31/20$ Equity in Subsidiary Earnings

Investment in Rambis Company

Herbert's Internal Income

Add: Equity in Investee Income

Net Income

Retained Earnings $1/1/20$

Add: Net Income

Less: Dividends Paid

Retained Earnings $12/31/20$

Note: Since the equity method is used, Herbert's net income and retained earnings includes the accrual for the

subsidiary's income. So the consolidated retained earnings will be the same as Herbert's retained earnings

B$.$ What is the amount reported as consolidated Retained Earnings on December $31,2021?$

C$.$ What is the Investment in Rambis account balance on Herbert$$s books on January $1,2020$ when the parent uses the equity method?

D$.$ What is the Investment in Rambis account balance on Herbert$$s books on January $1,2021$ when the parent uses the equity method?$15$

$2020$ journal entries for Herbert Inc.

To record the acquistion transaction

$1/1/20$ Investment in Rambis Company

Cash

$12/31/20$ Cash

Investment in Rambis Company

To accrue the subsidiary income

$12/31/20$ Investment in Rambis Company

Equity in Subsidiary Earnings

To recognize amortization on allocations

$12/31/20$ Equity in Subsidiary Earnings

Investment in Rambis Company

Investment in Rambis

Equity in Subsidiary Earnings

Equity in Subsidiary Earnings

Herbert's Internal Income

Add: Equity in Investee Income

Net Income

Retained Earnings $1/1/20$

Add: Net Income

Less: Dividends Paid

Retained Earnings $12/31/20$

Note: Since the equity method is used, Herbert's net income and retained earnings includes the accrual for the subsidiary's income. So the consolidated retained earnings will be the same as Herbert's retained earnings

$2021$ journal entries for Herbert Inc.

To record receipt of dividend

$\frac{12}{31}\frac{?}{18}$ Cash

Investment in Rambis Company

To accrue the subsidiary income

$12/31/21$ Investment in Rambis Company

Equity in Subsidiary Earnings

To recognize amortization on allocations

$12/31/21$ Equity in Subsidiary Earnings

Investment in Rambis Company

Investment in Rambis

Herbert's Internal Income

Add: Equity in Investee Income

Net Income

Retained Earnings $1/1/21$

Add: Net Income

Less: Dividends Paid

Retained Earnings $12/31/21$

A $2020$ Consolidated Retained Earnings

B $2021$ Consolidated Retained Earnings

C $2020$ Investment in Ramis balance

D $2021$ Investment in Ramis balance