On January 1, 2014, Pinnacle Corporation exchanged $3,518,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash	$	104,000		Accounts payable	$	424,000
Accounts receivable		373,000		Long-term debt		3,080,000
Inventory		437,000		Common stock		1,500,000
Buildings (net)		2,335,000		Retained earnings		1,285,000
Licensing agreements		3,040,000
	$	6,289,000			$	6,289,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)			$	3,518,000
Carrying amount acquired				2,785,000
Excess fair value			$	733,000
to buildings (undervalued)	$	382,000
to licensing agreements (overvalued)		(134,000)		248,000
to goodwill (indefinite life)			$	485,000

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, Stratas accounts payable included an $94,800 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 financial statements for the two companies for the year ending December 31, 2015, follow. Credit balances are indicated by parentheses.

	Pinnacle			Strata
Sales	$	(7,046,000	)	$	(3,539,000	)
Cost of goods sold		4,660,000			2,100,000
Interest expense		257,000			196,000
Depreciation expense		639,000			354,000
Amortization expense					608,000
Dividend income		(60,000	)
Net income	$	(1,550,000	)	$	(281,000	)
Retained earnings 1/1/15	$	(5,360,000	)	$	(1,564,400	)
Net income		(1,550,000	)		(281,000	)
Dividends paid		500,000			60,000
Retained Earnings 12/31/15	$	(6,410,000	)	$	(1,785,400	)
Cash	$	417,000		$	360,400
Accounts receivable		1,650,000			300,000
Inventory		1,270,000			1,275,000
Investment in Strata		3,518,000
Buildings (net)		5,680,000			2,506,000
Licensing agreements					1,824,000
Goodwill		412,500
Total assets	$	12,947,500		$	6,265,400
Accounts payable	$	(537,500	)	$	(830,000	)
Long-term debt		(3,000,000	)		(2,150,000	)
Common stock		(3,000,000	)		(1,500,000	)
Retained earnings 12/31/15		(6,410,000	)		(1,785,400	)
Total Liabilities and OE	$	(12,947,500	)	$	(6,265,400	)

a.	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.)

b.	Compute the following amounts that would appear on Pinnacles 2015 separate (nonconsolidated) financial records if Pinnacles investment accounting was based on the equity method.

c.

What effect does the parents internal investment accounting method have on its consolidated financial statements?

	Higher effect
	Lower effect
	No effect