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On January 1, 2017, Pinnacle Corporation exchanged $3,477,500 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 $ 94,000 339,000 352,000 2,160,000 3,130,000 $ 6,075,000 Accounts payable Long-term debt Common stock Retained earnings $ 400,000 2,880,000 1,500,000 1,295,000 $ 6,075,000 Pinnacle prepared the following fair-value allocation: $ 3,477,500 2,795,000 $ 682,500 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 350,000 (125,000) 225,000 457,500 $ At the acquisition date, Strata's buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata's accounts payable included an $90,000 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, 2018, follow. Credit balances are indicated by parentheses. Credit balances are indicated by parentheses. Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/18 Net income Dividends declared Retained Earnings 12/31/18 Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/18 Total Liabilities and OE Pinnacle Strata $ (7,340,000) $ (3,502,000) 4,675,000 2,070,000 272,000 176,000 603,000 427,000 626,000 (35,000) $ (1,825,000) $ (203,000) $ (5,240,000) $ (1,581,000) (1,825,000) (203,000) 600,000 35,000 $ (6,465,000) $ (1,749,000) 292,500 $ 425,000 1,595,000 282,500 1,100,000 1,600,000 3,477,500 5,775,000 2,256,000 1,878,000 410,000 $ 12,650,000 $ 6,441,500 $ (375,000) $ (862,500) (2,810,000) (2,330,000) (3,000,000) (1,500,000) (6,465,000) (1,749,000) $(12,650,000) $ (6,441,500) a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2018 separate (nonconsolidated) financial records if Pinnacle's investment accounting was hased on the eruit method a. Prepare a worksheet to consolidate the financial information for these two companies. b. Compute the following amounts that would appear on Pinnacle's 2018 separate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/18. 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, 2018 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income $ (7,340,000) $ (3,502,000) 4,675,000 2,070,000 272,000 176,000 603,000 427,000 626.000 (35,000) $ (1,825,000) $ (203,000) Retained earnings 1/1/18 Net income Dividends declared Retained earnings 12/31/18 (5,240,000) (1,581,000) (1,825,000) (203,000) 600,000 35,000 $ (6,465,000) $ (1.749,000) $ Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets 292,500 $ 1,595,000 1,100,000 3,477,500 5,775,000 425,000 282,500 1,600,000 2,256,000 1,878,000 410,000 $ 12,650,000 $ 6,441,500 Arrunte navale 1375 non (RR 500 Retained earnings 1/1/18 Net income Dividends declared Retained earnings 12/31/18 (5,240,000) (1,581,000) (1,825,000) (203,000) 600,000 35,000 $ (6,465,000) $ (1,749,000) $ Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets 292,500 $ 1,595,000 1,100,000 3,477,500 5,775,000 425,000 282,500 1,600,000 2,256,000 1,878,000 410,000 $ 12,650,000 $ 6,441,500 Accounts payable (375,000) (862,500) Long-term debt (2,810,000) (2,330,000) Common stock - Pinnacle (3,000,000) Common stock - Strata (1,500,000) Retained earnings 12/31/18 (6,465,000) (1,749,000) Total Liabilities and Owner's Equity $(12,650,000) $ (6.441,500) Required B > Required A Required B Required c Compute the following amounts that would appear on Pinna Pinnacle's investment accounting was based on the equity 1 Subsidiary income 2 Retained earnings 1/1/18 3 Investment in Strata
