On January 1, 2017, Pinnacle Corporation exchanged $3,711,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: 5 Cash Accounts receivable Inventory Buildings (net) Licensing agreements $ 296,000 312,000 377,eee 2,030,000 3,275,000 $ 6,290,000 Accounts payable Long-term debt Common stock Retained earnings 435,890 2,805,000 1,500,000 1,550,000 $ 6,290,000 Pinnacle prepared the following fair value allocation: $ 3,711,000 3,250,000 $ 661,000 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill indefinite life) $ 338,000 (186.000) 232.000 429.00 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, Strato's accounts payable included an $97,000 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 (7,782,890) 5,010,000 256,000 616,000 Strata (3,356,000) 1.840,000 280,000 423,00 655,000 $ $ S $ Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/18 Net Income Dividends declared Retained Earnings 12/31/18 Cash Accounts receivable Inventory Investeent in Strata Buildings (net) Licensing agreements Goodwill Total assets 5 $ (35.000) (1,935,000) (5,860,000) (1.935,000) 600,000 (6,395,600) 294,200 1,545,000 985,000 3,711,000 5,580,000 5 $ (238,000) (1,899,600) (238,000) 35,000 (2,102,600) 539,600 247.500 1,710,000 2.208.000 1,965.000 $ 405,000 12.320.000 $ 6,670, 100 $ S $ (6,395,000) 294,000 1,545,000 985,899 3,711,000 5,880,690 (2,102,680) 539,620 247,500 1,710,890 2,288, 890 1,965,800 Retained Earnings 12/31/18 Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/18 Total Liabilities and OE $ $ 405,000 $ 12,820,000 (415,000) (3,010,000) (3,800,000) (6,395, 000) $ (12,820, 088) 6,670, 100 (957,500) (2,110,000) (1,500,000) (2,102,680) (6,670, 100) $ a. Prepare a worksheet to consolidate the financial information for these two companies b. 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. c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Complete this question by entering your answers in the tabs below. Required A Required B Required What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method No effect
