Adams, Inc., acquires Clay Corporation on January 1, 2010, in exchange for $510,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay€™s equipment (with a five-year life) is actually worth $440,000. Credit balances are indicated by parentheses.

In 2010, Clay earns a net income of $55,000 and pays a $5,000 cash dividend. In 2010, Adams reports income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2011, selected account balances for the two companies are as follows:

a. What are the December 31, 2011, Investment Income and Investment in Clay account balances assuming Adams uses the:
1. Initial value method.
2. Equity method.
b. How does the parent€™s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2011, consolidated income statement?
c. How does the parent€™s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2011, consolidated balance sheet?
d. What is Adams€™s January 1, 2011, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:
1. Initial value method.
2. Equity method.
e. What worksheet adjustment to Adams€™s January 1, 2011, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?
f. Prepare the worksheet entry to eliminate Clay€™s stockholders€™ equity.
g. What is consolidated net income for2011?

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Adams Clay 5 300,000 220,000 Current assets Investment in Clay Equipment Liabilities Common stock Retained earnings, 1/1/10 510,000 600,000 390,000 (200,000) 160,000) (350,000) (150,000) (860,000) 300,000) -- .-....6 Adams Clay Revenues Expense5. Investment income Retained earnings, 1/1/11 Dividends declared Common stock Current assets Investment in Clay Equipment Liabilities . $400,000) $(240,000) 290,000 180,000 Not given Not given 350,000) 8,000 (350,000) (150,000) 580,000 262,000 Not given 20,000 420,000 152,000 (130,000)