On January 1, 2020, Pinnacle Corporation exchanged $3,683,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash	$	142,000			Accounts payable	$	410,000
Accounts receivable		348,000			Long-term debt		2,985,000
Inventory		435,000			Common stock		1,500,000
Buildings (net)		2,020,000			Retained earnings		1,405,000
Licensing agreements		3,355,000
Total assets	$	6,300,000			Total liabilities and equity	$	6,300,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)					$	3,683,500
Carrying amount acquired						2,905,000
Excess fair value					$	778,500
to buildings (undervalued)	$	418,000
to licensing agreements (overvalued)		(121,000	)			297,000
to goodwill (indefinite life)					$	481,500

At the acquisition date, Stratas buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Stratas accounts payable included an $92,000 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, 2021, follow. Credit balances are indicated by parentheses.

	Pinnacle				Strata
Sales	$	(7,665,000	)		$	(3,467,000	)
Cost of goods sold		4,920,000				1,985,000
Interest expense		327,000				220,000
Depreciation expense		618,000				385,000
Amortization expense						671,000
Dividend income		(40,000	)
Net income	$	(1,840,000	)		$	(206,000	)
Retained earnings 1/1/21	$	(5,185,000	)		$	(1,732,600	)
Net income		(1,840,000	)			(206,000	)
Dividends declared		450,000				40,000
Retained Earnings 12/31/21	$	(6,575,000	)		$	(1,898,600	)
Cash	$	241,500			$	463,600
Accounts receivable		1,295,000				357,500
Inventory		1,305,000				1,590,000
Investment in Strata		3,683,500
Buildings (net)		5,765,000				2,222,000
Licensing agreements						2,013,000
Goodwill		540,000
Total assets	$	12,830,000			$	6,646,100
Accounts payable	$	(520,000	)		$	(852,500	)
Long-term debt		(2,735,000	)			(2,395,000	)
Common stock		(3,000,000	)			(1,500,000	)
Retained earnings 12/31/21		(6,575,000	)			(1,898,600	)
Total Liabilities and Owner's equity	$	(12,830,000	)		$	(6,646,100	)

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

1. Compute the following amounts that would appear on Pinnacles 2021 separate (nonconsolidated) financial records if Pinnacles investment accounting was based on the equity method.

• Subsidiary income.
• Retained earnings, 1/1/21.
• Investment in Strata.

1. What effect does the parents 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 C Compute the following amounts that would appear on Pinnacle's 2021 separate (nonconsolidated) financial records 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 Sales Cost of goods sold $ (7,665,000) $ (3,467,000) 4,920,000 1,985,000 327,000 220,000 Interest expense $ 11,132,000 6,905,000 547,000 1,044,800 646,800 618,000 385,000 41,800 Depreciation expense Amortization expense 671,000 24,200 Dividend income 40,000 0 (40,000) $ (1,840,000) $ Net income (206,000) $ 1,988,400 Retained earnings 1/1/21 1,732,600 Net income 1,988,400 (5,185,000) (1,840,000) 450,000 $ (6,575,000) (1,732,600) (206,000) 40,000 $ (1,898,600) Dividends declared 40,000 450,000 Retained earnings 12/31/21 Cash $ $ 705, 100 Accounts receivable 463,600 357,500 1,590,000 92,000 241,500 1,295,000 1,305,000 3,683,500 5,765,000 1,560,500 2,895,000 Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill 2,222,000 2,013,000 41,800 96,800 24,200 1,940,400 540,000 $ 12,830,000 Total assets $ 6,646,100 92,000 Accounts payable Long-term debt Common stock - Pinnacle (520,000) (2,735,000) (3,000,000) (852,500) (2,395,000) 1,280,500 5,130,000 3,000,000 1,500,000 0 Common stock - Strata Retained earnings 12/31/21 Total Liabilities and Owner's Equity (6,575,000) $(12,830,000) (1,500,000) (1,898,600) $ (6,646,100) $ 3,430,600 $ 294,800