Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2021 (credit balances indicated by parentheses). Michael acquired all of Aaron's outstanding voting stock on January 1, 2017, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company's stock actively traded at $35.00 per share. Michael Company 12/31/21 $ (713,500) 321,750 114,900 (5,000) $ (281,850 $ (940,000 (281,850) Aaron Company 12/31/21 $ (424,500) 167,250 129,500 90,000 Revenues Cost of goods sold Amortization expense Dividend income Net income Retained earnings, 1/1/21 Net income (above) Dividends declared Retained earnings, 12/31/21 Cash Receivables Inventory Investment in Aaron Company Copyrights Royalty agreements 2 Total assets Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings, 12/31/21 Total liabilities and equity $ (127,750) $ (737,000) (127,750) 5,000 $ (859,750) $ 19,000 223,000 336,000 $(1,131,850) $ 197,000 389,000 635,000 700,000 539,000 954,000 $ 3,414,000 $(1,182,150) (300,000) (500,000) (300,000) (1,131,850) $(3,414,000) 412,000 421,000 $ 1,411,000 $ (421,250) (100,000) (30,000) (859,750) $(1,411,000) On the date of acquisition, Aaron reported retained earnings of $460,000 and a total book value of $590,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2021. b. Assuming that Michael applied the equity method to this investment, what would the following account balances be on the parent's individual financial statements? Consolidated Totals Accounts Revenues Cost of goods sold Amortization expense Dividend income Net income MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2021 Consolidation Entries Michael Aaron Debit Credit $ (713,500) $ (424,500) 321,750 167,250 114,900 129,500 (5,000) (281,850) $ (127,750) $ Retained earning, 1/1/21 (Michael) Retained earning, 1/1/21 (Aaron) Net income (above) Dividends declared Retained earnings, 12/31/21 (940,000) 0 (281,850) 90,000 (1,131,850) $ 0 (737,000) (127,750) 5,000 (859,750) $ $ Cash Receivables Inventory Investment in Aaron Co. Copyrights Royalty agreements Trademark Total assets 197,000 $ 389,000 635,000 700,000 539,000 954,000 19,000 223,000 336,000 0 412,000 421,000 0 $ 3,414,000 $ 1,411,000 $ Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings, 12/31/21 (above) Total liabilities and equity (1,182,150) $ (300,000) (500,000) (300,000) (1,131,850) (3,414,000) $ (421,250) 0 (100,000) (30,000) (859,750) (1,411,000) $ $ 0 $ 0 Required A Required B Assuming that Michael applied the equity method to this investment, what would the following account balances be on the parent's individual financial statements? Amounts Equity in Earnings of Aaron 12/31/21 Retained earnings, 1/1/21 Investment in Aaron 12/31/21 Retained earnings, 12/31/21
