On January 1, 2020, Pinnacle Corporation exchanged $3,817,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash	$	331,000			Accounts payable	$	474,000
Accounts receivable		321,000			Long-term debt		2,590,000
Inventory		367,000			Common stock		1,500,000
Buildings (net)		2,075,000			Retained earnings		1,590,000
Licensing agreements		3,060,000
Total assets	$	6,154,000			Total liabilities and equity	$	6,154,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)					$	3,817,000
Carrying amount acquired						3,090,000
Excess fair value					$	727,000
to buildings (undervalued)	$	426,000
to licensing agreements (overvalued)		(117,000	)			309,000
to goodwill (indefinite life)					$	418,000

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 $104,800 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.

	Pinnacle				Strata
Sales	$	(7,522,000	)		$	(3,636,000	)
Cost of goods sold		5,020,000				2,185,000
Interest expense		331,000				195,000
Depreciation expense		596,000				382,000
Amortization expense						612,000
Dividend income		(50,000	)
Net income	$	(1,625,000	)		$	(262,000	)
Retained earnings 1/1/21	$	(5,030,000	)		$	(1,906,200	)
Net income		(1,625,000	)			(262,000	)
Dividends declared		560,000				50,000
Retained Earnings 12/31/21	$	(6,095,000	)		$	(2,118,200	)
Cash	$	288,000			$	607,700
Accounts receivable		1,045,000				255,000
Inventory		1,350,000				1,775,000
Investment in Strata		3,817,000
Buildings (net)		5,700,000				2,302,000
Licensing agreements						1,836,000
Goodwill		560,000
Total assets	$	12,760,000			$	6,775,700
Accounts payable	$	(530,000	)		$	(757,500	)
Long-term debt		(3,135,000	)			(2,400,000	)
Common stock		(3,000,000	)			(1,500,000	)
Retained earnings 12/31/21		(6,095,000	)			(2,118,200	)
Total Liabilities and Owner's equity	$	(12,760,000	)		$	(6,775,700	)

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?

PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales Cost of goods sold Interest expense Depreciation expense Amortization expense $ (7,522,000) $ (3,636,000) 5,020,000 2,185,000 331,000 195,000 596,000 382,000 612,000 (50,000) $ (1,625,000) $ (262,000) Dividend income Net income Retained earnings 1/1/21 Net income (5,030,000) (1,625,000) 560,000 (1,906,200) (262,000) 50,000 Dividends declared Retained earnings 12/31/21 $ (6,095,000) $ (2,118,200) Cash $ $ Accounts receivable 288,000 1,045,000 1,350,000 3,817,000 5,700,000 607,700 255,000 1,775,000 Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill 2,302,000 1,836,000 560,000 $ 12,760,000 Total assets $ 6,775,700 Accounts payable Long-term debt Common stock - Pinnacle (530,000) (3,135,000) (3,000,000) (757,500) (2,400,000) Common stock - Strata Retained earnings 12/31/21 (1,500,000) (2,118,200) (6,095,000) ton Total Liabilities and Owner's Equity $(12,760,000) $ (6,775,700)