Question
Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances indicated by parentheses). Michael acquired all of
Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances indicated by parentheses). Michael acquired all of Aarons outstanding voting stock on January 1, 2014, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Companys stock actively traded at $34 per share.
| Michael Company 12/31/18 | Aaron Company 12/31/18 | ||||||
| Revenues | $ | (635,500) | $ | (469,500) | |||
| Cost of goods sold | 282,750 | 189,750 | |||||
| Amortization expense | 131,100 | 121,000 | |||||
| Dividend income | (5,000) | 0 | |||||
| Net income | $ | (226,650) | $ | (158,750) | |||
| Retained earnings, 1/1/18 | $ | (890,000) | $ | (795,000) | |||
| Net income (above) | (226,650) | (158,750) | |||||
| Dividends declared | 90,000 | 5,000 | |||||
| Retained earnings, 12/31/18 | $ | (1,026,650) | $ | (948,750) | |||
| Cash | $ | 139,000 | $ | 16,800 | |||
| Receivables | 397,000 | 271,000 | |||||
| Inventory | 576,000 | 376,000 | |||||
| Investment in Aaron Company | 690,000 | 0 | |||||
| Copyrights | 471,000 | 428,000 | |||||
| Royalty agreements | 924,000 | 447,000 | |||||
| Total assets | $ | 3,197,000 | $ | 1,538,800 | |||
| Liabilities | $ | (1,070,350) | $ | (460,050) | |||
| Preferred stock | (300,000) | 0 | |||||
| Common stock | (500,000) | (100,000) | |||||
| Additional paid-in capital | (300,000) | (30,000) | |||||
| Retained earnings, 12/31/18 | (1,026,650) | (948,750) | |||||
| Total liabilities and equity | $ | (3,197,000) | $ | (1,538,800) | |||
On the date of acquisition, Aaron reported retained earnings of $450,000 and a total book value of $580,000. 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. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements?
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