Question

1 Approved Answer

Posted on Jun 23, 2024

On January 1, 200', Pinnacle Corporation exchanged $3,424,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata

On January 1, 200', Pinnacle Corporation exchanged $3,424,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash :5 110.000 Accounts payable 3) 370,000 Accounts receivable 513.000 Longterm debt 0,105,000 Inventory 372.000 Common stock 1,500,000 Buildings (net) 1.070.000 Retained earnings 1,250,000 Licensing agreements 3.470.000 $ 6.243.000 $ 0,245,000 Pinnacle prepared the following fairevalue allocation: Fair value of Strata (consideration transferred) 0 3,424,500 Carrying amount acquired 2,750,000 Excess fair value 0 004.500 to buildings (undervalued) 0 370,000 to licensing agreements (overvalued) (120,000) 250,000 to goodwill (indefinite life) it At the acquisition date, Strata's buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 20l8, Strata's accounts payable included an $85,600 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata. The separate flnancial statements forthe two companies forthe year ending December 31, 2018. follow. Credit balances are indicated by parentheses. Pinnacle Strata Sales (7.170.000) (3.725.000) Cost of goods sold 4.720.000 2.125.000 Interest expense 202.000 247.000 Debreciat ion eXbense 058.000 432.000 Amortization expense 004.000 Dividend income (45.000) Net income (1.505.000) (227.000) Retained earnings 1/1/10 (5.235.000) (1.504.000) Net income (1 .505.000) (227.000) Dividends declared 500.000 45.000 Retained Earnings 12/31/10 (0.320.000) (1.006.000) Cash 205.500 300.000 Accounts receivable 1.500.000 535.000 Inventory 1.500.000 1.270.000 Investment in Strata 3.424.500 Buildings (net) 5.720.000 2.090.000 Licensing agreements 2.002.000 Goodwill 572.500 Total assets $ 12,842 ,500 6, 171 ,000 Accounts payable 532 ,500 ) (885 ,000) Long-term debt 2,990 ,000 (3 ,000 ,000 2, 100,000 Common stock Retained earnings 12/31/18 6,320 ,000 (1 ,500, 000 (1 , 686 ,000) Total Liabilities and QE $ (12,842 ,500) (6, 171 ,000 ) a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2018 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/18. Investment in Strata c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Complete this question by entering your answers in the tabs below. Required A Required B Required C Prepare a worksheet to consolidate the financial information for these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Negative amounts for the Consolidated Totals column should be entered with a minus sign.) Show lessA PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2018 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales $ (7, 178,000) $ (3,725,000) Cost of goods sold 4,720,000 2,125,000 Interest expense 262,000 247,000PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2018 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales $ (7, 178,000) $ (3,725,000) Cost of goods sold 4,720,000 2, 125,000 Interest expense 262,000 247,000 Depreciation expense 656,000 432,000 Amortization expense 694,000 Dividend income (45,000) Net income $ (1,585,000) $ (227,000) Retained earnings 1/1/18 (5,235,000) (1,504,000) Net income (1,585,000 227,000 0 Dividends declared 00,000 15,000 Retained earnings 12/31/18 $ (6,320,000) $ (1,686,000) $ 0 Cash $ 265,500 $ 386,000 Accounts receivable 1,560,000 335,000 Inventory 1,500,000 1,270,000 Investment in Strata 3,424,500 Buildings (net) 5,720,000 2,098,000 Licensing agreements 2,082,000 Goodwill 372,500 Total assets $ 12,842,500 $ 6,171,000 $ Accounts payable (532,500) 385,000) Long-term debt (2,990,000) (2, 100,000) Common stock - Pinnacle (3,000,000) Common stock - Strata (1,500,000) Retained earnings 12/31/18 (6,320,000 (1,686,000 0 Total Liabilities and Owner's Equity $ (12,842,500) $ (6, 171,000) $ 0 $ 0 $ 0a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2018 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. . Subsidiary income. . Retained earnings, 1/1/18. . Investment in Strata. c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Complete this question by entering your answers in the tabs below. Required A Required B Required C Compute the following amounts that would appear on Pinnacle's 2018 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. 1 Subsidiary income 2 Retained earnings 1/1/18 3 Investment in Strata