On January 1, 2023, 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	$ 196,000	Accounts payable	$ 381,000
Accounts receivable	345,000	Long-term debt	2,945,000
Inventory	385,000	Common stock	1,500,000
Buildings (net)	1,905,000	Retained earnings	1,290,000
Licensing agreements	3,285,000
Total assets	$ 6,116,000	Total liabilities and equity	$ 6,116,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)		$ 3,415,000
Carrying amount acquired		2,790,000
Excess fair value		$ 625,000
to buildings (undervalued)	$ 324,000
to licensing agreements (overvalued)	(113,000)	211,000
to goodwill (indefinite life)		$ 414,000

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, 2024, Stratas 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, 2024, follow. Credit balances are indicated by parentheses.

Accounts	Pinnacle	Strata
Sales	$ (7,507,000)	$ (3,500,000)
Cost of goods sold	4,950,000	2,020,000
Interest expense	265,000	232,000
Depreciation expense	642,000	351,000
Amortization expense	-	657,000
Dividend income	(60,000)	-
Net income	$ (1,710,000)	$ (240,000)
Retained earnings 1/1/24	$ (5,150,000)	$ (1,603,800)
Net income	(1,710,000)	(240,000)
Dividends declared	500,000	60,000
Retained Earnings 12/31/24	$ (6,360,000)	$ (1,783,800)
Cash	$ 417,500	$ 415,800
Accounts receivable	1,440,000	250,000
Inventory	1,365,000	1,555,000
Investment in Strata	3,415,000	-
Buildings (net)	5,850,000	2,162,000
Licensing agreements	-	1,971,000
Goodwill	382,500	-
Total assets	$ 12,870,000	$ 6,353,800
Accounts payable	$ (410,000)	$ (955,000)
Long-term debt	(3,100,000)	(2,115,000)
Common stock	(3,000,000)	(1,500,000)
Retained earnings 12/31/24	(6,360,000)	(1,783,800)
Total Liabilities and Owner's equity	$ (12,870,000)	$ (6,353,800)

Required:

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

Compute the following amounts that would appear on Pinnacles 2024 separate (nonconsolidated) financial records if Pinnacles investment accounting was based on the equity method.

• Subsidiary income.
• Retained earnings, 1/1/24.
• Investment in Strata.

What effect does the parents internal investment accounting method have on its consolidated financial statements?

Problem 3-31 (Algo) (LO 3-1, 3-3a, 3-3b, 3-4) On January 1, 2023, 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: Pinnacle prepared the following fair-value allocation: 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, 2024, 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, 2024, follow. Credit balances are indicated by parentheses. a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2024 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. - Subsidiary income. - Retained earnings, 1/1/24. - Investment in Strata. c. What effect does the parent's internal investment accounting method have on its consolidated financial statements? \begin{tabular}{|c|c|c|c|c|c|c|c|} \hline \multicolumn{8}{|c|}{ Consolidation Worksheet } \\ \hline \multicolumn{8}{|c|}{ For Year December 31, 2024} \\ \hline \multirow{2}{*}{ Accounts } & \multirow{2}{*}{\multicolumn{2}{|c|}{ Pinnacle }} & \multirow{2}{*}{\multicolumn{2}{|c|}{ Strata }} & \multicolumn{2}{|c|}{ Consolidation Entries } & \multirow{2}{*}{\begin{tabular}{c} Consolidated \\ Totals \end{tabular}} \\ \hline & & & & & Debit & Credit & \\ \hline Sales & $ & (7,507,000) & $ & (3,500,000) & & & \\ \hline Cost of goods sold & & 4,950,000 & & 2,020,000 & & & \\ \hline Interest expense & & 265,000 & & 232,000 & & & \\ \hline Depreciation expense & & 642,000 & & 351,000 & & & \\ \hline Amortization expense & & & & 657,000 & & & \\ \hline Dividend income & & (60,000) & & & & & \\ \hline Net income & $ & (1,710,000) & $ & (240,000) & & & \\ \hline Retained earnings 1/1/24 & & (5,150,000) & & (1,603,800) & & & \\ \hline Net income & & (1,710,000) & & (240,000) & & & \\ \hline Dividends declared & & 500,000 & & 60,000 & & & \\ \hline Retained earnings 12/31/24 & $ & (6,360,000) & $ & (1,783,800) & & & \\ \hline Cash & $ & 417,500 & $ & 415,800 & & & \\ \hline Accounts receivable & & 1,440,000 & & 250,000 & & & \\ \hline Inventory & & 1,365,000 & & 1,555,000 & & & \\ \hline Investment in Strata & & 3,415,000 & & & & & \\ \hline Buildings (net) & & 5,850,000 & & 2,162,000 & & & \\ \hline Licensing agreements & & & & 1,971,000 & & & \\ \hline Goodwill & & 382,500 & & & & & \\ \hline Total assets & $ & 12,870,000 & $ & 6,353,800 & & & \\ \hline Accounts payable & & (410,000) & & (955,000) & & & \\ \hline Long-term debt & & (3,100,000) & & (2,115,000) & & & \\ \hline Common stock - Pinnacle & & (3,000,000) & & & & & \\ \hline Common stock - Strata & & & & (1,500,000) & & & \\ \hline Retained earnings 12/31/24 & & (6,360,000) & & (1,783,800) & & & \\ \hline Total Liabilities and Owner's Equitv & $ & (12.870.000) & $ & (6.353.800) & & & \\ \hline \end{tabular} - Subsidiary income. - Retained earnings, 1/1/24. - 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. Compute the following amounts that would appear on Pinnacle's 2024 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. - Subsidiary income. - Retained earnings, 1/1/24. - Investment in Strata. Note: Input all amounts as positive values. a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2024 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. - Subsidiary income. - Retained earnings, 1/1/24. - 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. What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method