Question
On January 1, 2014, Pinnacle Corporation exchanged $3,200,000 cash for 100% of the outstanding voting stock of Strata Corporation. On the acquisition date, Strate ahd
On January 1, 2014, Pinnacle Corporation exchanged $3,200,000 cash for 100% of the outstanding voting stock of Strata Corporation. On the acquisition date, Strate ahd the following balance sheet:
Cash | 122,000 |
AR | 283,000 |
Inventory | 350,000 |
Buildings (net) | 1,875,000 |
Licensing agreements | 3,000,000 |
AP | 375,000 |
Long-term debt | 2,655,000 |
Common stock | 1,500,000 |
Retained earnings | 1,100,000 |
Pinnacle prepared the following fair-value allocation:
Fair value of Strata (consideration) | 3,200,000 | ||
Carrying amount required | 2,600,000 | ||
Excess fair value | 600,000 | ||
to buildings (undervalued) | 300,000 | ||
to licensing agreements (overvalued) | (100,000) | 200,000 | |
to goodwill (indefinite life) | 400,000 |
At the acquisition date, Stratas buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2015, Strats accounts payable included an $85,000 curent liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnalce mploys the initial value method in its intneral accounting for its investment in Strata. The separate financial statements for the two companies for the year ending December 31, 2015, follow. Credit balances are indicated by parentheses.
Pinnacle | Strata | |
Sales | (7,000,000) | (3,000,000) |
Cost of goods sold | 4,650,000 | 1,700,000 |
Interest expense | 255,000 | 160,000 |
Depreciation expense | 585,000 | 350,000 |
Amortization expense | - | 600,000 |
Dividend income | (50,000) | |
Net income | (1,560,000) | (190,000) |
Retained earnings, 1/1/15 | (5,000,000) | (1,350,000) |
Net income | (1,560,000) | (190,000) |
Dividends declared | 560,000 | 50,000 |
Retained earnings, 12/31/15 | (6,000,000) | (1,490,000) |
Cash | 433,000 | 165,000 |
AR | 1,210,000 | 200,000 |
Inventory | 1,235,000 | 1,500,000 |
Investment in Strata | 3,200,000 | - |
Buildings (net) | 5,572,000 | 2,040,000 |
Licensing agreements | - | 1,800,000 |
Goodwill | 350,000 | |
Total assets | 12,000,000 | 5,705,000 |
Accounts payable | (300,000) | (715,000) |
Long-term debt | (2,700,000) | (2,000,000) |
Common stock | (3,000,000) | (1,500,000) |
Retained earnings, 12/31/15 | (6,000,000) | (1,490,000) |
Total liabilities/OE | (12,000,000) | (5,705,000) |
Answer the following:
Prepare a worksheet to consolidate the financial information for these two companies.
Compute the following amounts that would appear on Pinnacles 2015 separate (nonconsolidated) financial records if Pinnacles investment accounting was on the equity method.
Subsidiary income
Retained earnings, 1/1/15
Investment in Strata
What effect does the parents internal investment accounting method have on its consolidated financial statements?
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