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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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