On January 1, 2014, Pinnacle Corporation exchanged $3,200,000 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. At December 31, 2015, Strata’s accounts payable included an $85,000 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, 2015, 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 2015 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.
• Subsidiary income.
• Retained earnings 1/1/15.
• Investment in Strata.
c. What effect does the parent’s internal investment accounting method have on its consolidated financial statements?

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Cash Accounts receivable Inventory Buildings (net) Licensing agreements. 122,000 283,000 350,000 1,875,000 3,000,000 $5,630,000 Accounts payable Long-term debt Common stock Retained earnings 375,000 2,655,000 1,500,000 1,100,000 $5,630,000 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value $3,200,000 2,600,000 600,000 to buildings (undervalued) to licensing agreements (overvalued to goodwill (indefinite life) $300,000 (100,000) 200,000 $ 400,000 Pinnacle Strata Sales Cost of goods sold. Interest expense Depreciation expense.. Amortization expense Dividend income $(7,000,000 (3,000,000) 1,700,000 160,000 350,000 600,000 4,650,000 255,000 585,000 (50,000) $(1,560,000) Net income (190,000) Retained earnings 1/1/15 Net income Dividends declared $(5,000,000 $1,350,000) (190,000) 50,000 (1,560,000) 560,000 Retained earnings 1231/15··· Cash (6,000,000) (1,490,000) $433,000 165,000 200,000 1,500,000 Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodll. 1,210,000 1,235,000 3,200,000 5,572,000 2,040,000 1,800,000 350,000 $12,000,000 5,705,000 Total assets . Accounts payable Long-term debt Common stock Retained earnings 12/31/15 $(300,000) (715,000) (2,700,000) (2,000,000) (1,500,000) (6,000,000) (1.490,000) $(12,000,000) $(5,705,000) (3,000,000) , Total liabilities and OE