Chapter 3 Exercise 15 (revised)

Herbert, Inc. acquired all of Rambis Company?s outstanding stock on January 1, 2014 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 2014 and $ 50,000 in 2015 and paid $ 10,000 in dividends each year. Rambis reported net income of $ 20,000 in 2014 and $ 30,000 in 2015 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, 2014?

B. What is the amount reported as consolidated Retained Earnings on December 31, 2015?

C. What is the Investment in Rambis account balance on Herbert?s books on January 1, 2014 when the parent uses the equity method?

D. What is the Investment in Rambis account balance on Herbert?s books on January 1, 2015 when the parent uses the equity method?

SHOW YOUR WORK IN COMPUTING THE ABOVE

15 1/1/14 2014 journal entries for Herbert Inc. To record the acquistion transaction Investment in Rambis Company Cash To record receipt of dividend 12/31/14 Cash Investment in Rambis Company To accrue the subsidiary income 12/31/14 Investment in Rambis Company Equity in Subsidiary Earnings To recognize amortization on allocations 12/31/14 Equity in Subsidiary Earnings Investment in Rambis Company Investment in Rambis - Equity in Subsidiary Earnings - - Herbert's Internal Income Add: Equity in Investee Income Net Income Retained Earnings 1/1/14 Add: Net Income Less: Dividends Paid Retained Earnings 12/31/14 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 2015 journal entries for Herbert Inc. To record receipt of dividend 12/31/15 Cash Investment in Rambis Company To accrue the subsidiary income 12/31/15 Investment in Rambis Company Equity in Subsidiary Earnings To recognize amortization on allocations 12/31/15 Equity in Subsidiary Earnings Investment in Rambis Company Investment in Rambis - Equity in Subsidiary Earnings - - Herbert's Internal Income Add: Equity in Investee Income 1 of 2 Net Income Retained Earnings 1/1/15 Add: Net Income Less: Dividends Paid Retained Earnings 12/31/15 A B C D 2014 Consolidated Retained Earnings 2014 Consolidated Retained Earnings 2015 Investment in Ramis balance 2015 Investment in Ramis balance 2 of 2