On January 1, 2020, Pinnacle Corporation exchanged $3,415,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash Accounts receivable Inventory Buildings (net) Licensing agreements Total assets 196,000 Accounts payable 345,000 Long-term debt 385,000 Common stock 1,905,000 Retained earnings 3,285,000 $ 6,116,000 Total liabilities and equity Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 381,000 2,945,000 1,500,000 1,290,000 $ 6,116,000 $ 3,415,000 2,790,000 $ 625,000 $ 324,000 (113,000) $ 211,000 414,000 At the acquisition date, Strata's buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata's accounts payable included an $86,200 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, 2021, follow. Credit balances are indicated by parentheses. Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/21 Net income Dividends declared Retained Earnings 12/31/21 Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Pinnacle Strata $ (7,507,000) $ (3,500,000) 4,950,000 265,000 642,000 (60,000) 2,020,000 232,000 351,000 657,000 $ (1,710,000) $ (240,000) $ (5,150,000) $ (1,603,800) (1,710,000) 500,000 (240,000) 60,000 $ (6,360,000) $ (1,783,800) $ 417,500 $ 415,800 1,440,000 250,000 1,365,000 1,555,000 3,415,000 5,850,000 2,162,000 1,971,000 382,500 $ 12,870,000 $ 6,353,800 $ (410,000) $ (955,000) (3,100,000) (2,115,000) (3,000,000) (1,500,000) (6,360,000) (1,783,800) Total Liabilities and Owner's equity $ (12,870,000) $ (6,353,800) Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/21 a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2021 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/21. Investment in Strata. c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Sales Accounts PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Pinnacle Strata $ (7,507,000) $ (3,500,000) Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/21 Net income Dividends declared 4,950,000 2,020,000 265,000 232,000 642,000 351,000 657,000 (60,000) $ (1,710,000) $ (240,000) (5,150,000) (1,603,800) (1,710,000) 500,000 (240,000) 60,000 Retained earnings 12/31/21 $ (6,360,000) $ (1,783,800) Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets $ 417,500 $ 415,800 1,440,000 250,000 1,365,000 1,555,000 3,415,000 5,850,000 2,162,000 1,971,000 382,500 $ 12,870,000 $ 6,353,800 Accounts payable Long-term debt Common stock - Pinnacle Common stock - Strata Retained earnings 12/31/21 Total Liabilities and Owner's Equity Debit Consolidation Entries Credit Consolidated Totals (410,000) (955,000) (3,100,000) (2,115,000) (3,000,000) (1,500,000) (6,360,000) (1,783,800) $ (12,870,000) $ (6,353,800) $ 0 $ 0 Compute the following amounts that would appear on Pinnacle's 2021 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. (Input all amounts as positive values.) 1 Subsidiary income 2 Retained earnings 1/1/21 3 Investment in Strata Amounts What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method