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Item 8

Item 8 6.25 points

Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2018 (credit balances indicated by parentheses). Michael acquired all of Aarons outstanding voting stock on January 1, 2014, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Companys stock actively traded at $34.50 per share.

	Michael Company 12/31/18				Aaron Company 12/31/18
Revenues	$	(635,500	)		$	(469,500	)
Cost of goods sold		282,750				189,750
Amortization expense		131,100				121,000
Dividend income		(5,000	)			0
Net income	$	(226,650	)		$	(158,750	)
Retained earnings, 1/1/18	$	(890,000	)		$	(795,000	)
Net income (above)		(226,650	)			(158,750	)
Dividends declared		90,000				5,000
Retained earnings, 12/31/18	$	(1,026,650	)		$	(948,750	)
Cash	$	139,000			$	16,800
Receivables		397,000				271,000
Inventory		576,000				376,000
Investment in Aaron Company		690,000				0
Copyrights		471,000				428,000
Royalty agreements		924,000				447,000
Total assets	$	3,197,000			$	1,538,800
Liabilities	$	(1,070,350	)		$	(460,050	)
Preferred stock		(300,000	)			0
Common stock		(500,000	)			(100,000	)
Additional paid-in capital		(300,000	)			(30,000	)
Retained earnings, 12/31/18		(1,026,650	)			(948,750	)
Total liabilities and equity	$	(3,197,000	)		$	(1,538,800	)

On the date of acquisition, Aaron reported retained earnings of $450,000 and a total book value of $580,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period.

1. a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2018.

2. b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent's individual financial statements?

Consolidated Totals Accounts Revenues Cost of goods sold Amortization expense Dividend income Net income MICHAEL COMPANY AND CONSOLIDATED SUBSIDIARY Consolidation Worksheet For Year Ending December 31, 2018 Consolidation Entries Michael Aaron Debit Credit $ (635,500) $ (469,500) 282,750 189,750 131, 100 121,000 (5,000) 0 $ (226,650) $ (158,750) $ 0 (890,000) 0 Retained earnings, 1/1 (Michael) Retained earnings, 11 (Aaron) Net income (above) Dividends declared Retained earnings, 12/31 $ 0 (226,650) 90,000 (1,026,650) $ (795,000) (158,750) 5,000 (948,750) $ $ $ Cash Receivables Inventory Investment in Aaron Co. Copyrights 139,000 $ 397,000 576,000 690,000 471,000 16,800 271,000 376,000 0 428,000 Copyrights Royalty agreements Trademark Total assets 471,000 924,000 0 428,000 447,000 0 3,197,000 $ 1,538,800 $ 0 $ (460,050) 0 Liabilities Preferred stock Common stock Additional paid-in capital Retained earnings, 12/31 (above) Total liabilities and equity (1,070,350) $ (300,000) (500,000) (300,000) (1,026,650) (3,197,000) $ (100,000) (30,000) (948,750) (1,538,800) $ 0 0 $ 0 $ 0 $ Required A Required B >