On January 1, 2017, Pinnacle Corporation exchanged $3,560,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash$302,000Accounts payable$394,000Accounts receivable317,000Long-term debt2,810,000Inventory370,000Common stock1,500,000Buildings (net)1,900,000Retained earnings1,420,000Licensing agreements3,235,000$6,124,000$6,124,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)$3,560,000Carrying amount acquired2,920,000Excess fair value$640,000to buildings (undervalued)$354,000to licensing agreements (overvalued)(138,000)216,000to goodwill (indefinite life)$424,000

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, 2018, Strata's accounts payable included an $88,800 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, 2018, follow. Credit balances are indicated by parentheses.

Pinnacle Strata

Sales $ (7,367,000 ) $ (3,484,000 )

Cost of goods sold 4,870,000 2,015,000

Interest expense 305,000 219,000

Depreciation expense 587,000 355,000

Amortization expense 647,000

Dividend income (45,000 )

Net income $ (1,650,000 ) $ (248,000 )

Retained earnings 1/1/18 $ (5,140,000 ) $ (1,733,800 )

Net income (1,650,000 ) (248,000 )

Dividends declared 500,000 45,000

Retained Earnings 12/31/18 $ (6,290,000 ) $ (1,936,800 )

Cash $ 290,000 $ 531,800

Accounts receivable 1,200,000 415,000

Inventory 1,285,000 1,435,000

Investment in Strata 3,560,000

Buildings (net) 5,780,000 2,159,000

Licensing agreements 1,941,000

Goodwill 432,500

Total assets $ 12,547,500 $ 6,481,800

Accounts payable $ (417,500 ) $ (780,000 )

Long-term debt (2,840,000 ) (2,265,000 )

Common stock (3,000,000 ) (1,500,000 )

Retained earnings 12/31/18 (6,290,000 ) (1,936,800 )

Total Liabilities and OE $ (12,547,500 ) $ (6,481,800 )

Prepare a

worksheet to consolidate the financial information for these two companies.

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.

What effect does the parent's internal investment accounting method have on its consolidated financial statements?