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On January 1, 2017, Pinnacle Corporation exchanged $3,527,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata

On January 1, 2017, Pinnacle Corporation exchanged $3,527,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash

$

284,000

Accounts payable

$

383,000

Accounts receivable

311,000

Long-term debt

3,060,000

Inventory

443,000

Common stock

1,500,000

Buildings (net)

1,920,000

Retained earnings

1,205,000

Licensing agreements

3,190,000

$

6,148,000

$

6,148,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)

$

3,527,500

Carrying amount acquired

2,705,000

Excess fair value

$

822,500

to buildings (undervalued)

$

480,000

to licensing agreements (overvalued)

(110,000

)

370,000

to goodwill (indefinite life)

$

452,500

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, 2018, Stratas accounts payable included an $86,600 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 financial statements for the two companies for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses.

Pinnacle

Strata

Sales

$

(7,683,000

)

$

(3,328,000

)

Cost of goods sold

4,940,000

1,835,000

Interest expense

338,000

207,000

Depreciation expense

630,000

448,000

Amortization expense

638,000

Dividend income

(35,000

)

Net income

$

(1,810,000

)

$

(200,000

)

Retained earnings 1/1/18

$

(5,160,000

)

$

(1,560,000

)

Net income

(1,810,000

)

(200,000

)

Dividends declared

600,000

35,000

Retained Earnings 12/31/18

$

(6,370,000

)

$

(1,725,000

)

Cash

$

282,000

$

547,000

Accounts receivable

1,255,000

305,000

Inventory

1,295,000

1,565,000

Investment in Strata

3,527,500

Buildings (net)

6,060,000

2,084,000

Licensing agreements

1,914,000

Goodwill

408,000

Total assets

$

12,827,500

$

6,415,000

Accounts payable

$

(337,500

)

$

(950,000

)

Long-term debt

(3,120,000

)

(2,240,000

)

Common stock

(3,000,000

)

(1,500,000

)

Retained earnings 12/31/18

(6,370,000

)

(1,725,000

)

Total Liabilities and OE

$

(12,827,500

)

$

(6,415,000

)

a. Prepare a worksheet to consolidate the financial information for these two companies.

PINNACLE COMPANY AND SUBSIDIARY STRATA

Consolidation Worksheet

For Year December 31, 2018

Consolidation Entries

Accounts

Pinnacle

Strata

Debit

Credit

Consolidated Totals

Sales

$(7,683,000)

$(3,328,000)

Cost of goods sold

4,940,000

1,835,000

Interest expense

338,000

207,000

Depreciation expense

630,000

448,000

Amortization expense

638,000

Dividend income

(35,000)

Net income

$(1,810,000)

$(200,000)

$0

Retained earnings 1/1/18

(5,160,000)

(1,560,000)

Net income

(1,810,000)

(200,000)

0

Dividends declared

600,000

35,000

Retained earnings 12/31/18

$(6,370,000)

$(1,725,000)

$0

Cash

$282,000

$547,000

Accounts receivable

1,255,000

305,000

Inventory

1,295,000

1,565,000

Investment in Strata

3,527,500

Buildings (net)

6,060,000

2,084,000

Licensing agreements

1,914,000

Goodwill

408,000

Total assets

$12,827,500

$6,415,000

$0

Accounts payable

(337,500)

(950,000)

Long-term debt

(3,120,000)

(2,240,000)

Common stock - Pinnacle

(3,000,000)

Common stock - Strata

(1,500,000)

Retained earnings 12/31/18

(6,370,000)

(1,725,000)

0

Total Liabilities and Owner's Equity

$(12,827,500)

$(6,415,000)

$0

$0

$0

b. Compute the following amounts that would appear on Pinnacles 2018 separate (nonconsolidated) financial records if Pinnacles investment accounting was based on the equity method.

Subsidiary income.

Retained earnings, 1/1/18.

Investment in Strata.

1

Subsidiary income

2

Retained earnings 1/1/18

3

Investment in Strata

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

Effect of parents internal investment accounting method

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