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On January 1, 2020, Pinnacle Corporation exchanged $3,561,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata
On January 1, 2020, Pinnacle Corporation exchanged $3,561,500 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 $ 242,000 368,000 394,000 1,870,000 3,240,000 $ 6,114,000 Accounts payable Long-term debt Common stock Retained earnings $ 434,000 2,780,000 1,500,000 1,400,000 Total liabilities and equity $ 6,114,000 Pinnacle prepared the following fair-value allocation: $ 3,561,500 2,900,000 661,500 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 348,000 (136,000) 212,000 449,500 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 $96,800 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, 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 Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/21 Total Liabilities and Owner's equity Pinnacle Strata $ (7,591,000) $ (3,523,000) 4,860,000 2,075,000 250,000 206,000 636,000 390,000 648,000 (55,000) $ (1,900,000) $ (204,000) $ (5,480,000) $ (1,666,600) (1,900,000) (204,000) 400,000 55,000 $ (6,980,000) $ (1,815,600) $ 231,000 $ 547,100 1,415,000 367,500 1,545,000 1,610,000 3,561,500 5,745,000 2,002,000 1,944,000 395,000 $ 12,892,500 $ 6,470, 600 $ (322,500) $ (840,000) (2,590,000) (2,315,000) (3,000,000) (1,500,000) (6,980,000) (1,815,600) $(12,892,500) $ (6,470,600) 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. . O 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? PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Consolidation Entries Accounts Pinnacle Strata Debit Credit Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income $ (7,591,000) 4,860,000 250,000 636,000 $ (3,523,000) 2,075,000 206,000 390,000 Consolidated Totals $ (11,114,000) 6,935,000 456,000 1,060,800 34,800 648,000 (55,000) $ (1,900,000) $ Net income (204,000) Retained earnings 1/1/21 Net income (5,480,000) (1,666,600) (1,900,000) (204,000) 400,000 55,000 $ (6,980,000) $ (1,815,600) Dividends declared Retained earnings 12/31/21 Cash $ $ Accounts receivable 231,000 1,415,000 1,545,000 3,561,500 5,745,000 547,100 367,500 1,610,000 Inventory Investment in Strata Buildings (net) 2,002,000 5,745,000 2,002,000 Buildings (net) Licensing agreements Goodwill 1,944,000 395,000 $ 12,892,500 $ Total assets 6,470,600 Accounts payable Long-term debt (322,500) (2,590,000) (3,000,000) (840,000) (2,315,000) Common stock - Pinnacle Common stock - Strata Retained earnings 12/31/21 Total Liabilities and Owner's Equity (6,980,000) $(12,892,500) (1,500,000) (1,815,600) $ (6,470,600) $ 34,800 $ 0 Required A Required B > Required A Required B Required C 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.) Amounts 1 Subsidiary income 2 Retained earnings 1/1/21 3 Investment in Strata
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