Herbert, Inc. acquired all of Rambis Company's outstanding stock on January 1, 2020 for $ 574,000 in
Question:
Herbert, Inc. acquired all of Rambis Company's outstanding stock on January 1, 2020 for $ 574,000 in cash. Annual excess amortization of $ 12,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $ 400,000, and Rambis reported a $ 200,000 balance. Herbert reported internal income of $ 40,000 in 2020 and $ 50,000 in 2021 and paid $ 10,000 in dividends each year. Rambis reported net income of $ 20,000 in 2020 and $ 30,000 in 2021 and paid $ 5,000 in dividends each year.
Assume that Herbert's internal income figures above do not include any income from the subsidiary. The parent uses the equity method.
A. What is the amount reported as consolidated Retained Earnings on December 31, 2020?
B. What is the amount reported as consolidated Retained Earnings on December 31, 2021?
| 2020 journal entries for Herbert Inc. | |||||||||
| To record the acquistion transaction | |||||||||
| 1/1/20 | Investment in Rambis Company | ||||||||
| Cash | |||||||||
| To record receipt of dividend | |||||||||
| 12/31/20 | Cash | ||||||||
| Investment in Rambis Company | |||||||||
| To accrue the subsidiary income | |||||||||
| 12/31/20 | Investment in Rambis Company | ||||||||
| Equity in Subsidiary Earnings | |||||||||
| To recognize amortization on allocations | |||||||||
| 12/31/20 | Equity in Subsidiary Earnings | ||||||||
| Investment in Rambis Company | |||||||||
| Investment in Rambis | Equity in Subsidiary Earnings | ||||||||
| - | - | - | - | ||||||
| - | - | ||||||||
| - | - | ||||||||
| Herbert's Internal Income | |||||||||
| Add: Equity in Investee Income | |||||||||
| Net Income | |||||||||
| Retained Earnings 1/1/20 | |||||||||
| Add: Net Income | |||||||||
| Less: Dividends Paid | |||||||||
| Retained Earnings 12/31/20 | |||||||||
| Note: Since the equity method is used, Herbert's net income and retained earnings includes the accrual for the subsidiary's income. So the consolidated retained earnings will be the same as Herbert's retained earnings | |||||||||
| 2021 journal entries for Herbert Inc. | |||||||||
| To record receipt of dividend | |||||||||
| 12/31/18 | Cash | ||||||||
| Investment in Rambis Company | |||||||||
| To accrue the subsidiary income | |||||||||
| 12/31/21 | Investment in Rambis Company | ||||||||
| Equity in Subsidiary Earnings | |||||||||
| To recognize amortization on allocations | |||||||||
| 12/31/21 | Equity in Subsidiary Earnings | ||||||||
| Investment in Rambis Company | |||||||||
| Investment in Rambis | Equity in Subsidiary Earnings | ||||||||
| - | - | - | - | ||||||
| - | - | ||||||||
| - | - | ||||||||
| Herbert's Internal Income | |||||||||
| Add: Equity in Investee Income | |||||||||
| Net Income | |||||||||
| Retained Earnings 1/1/21 | |||||||||
| Add: Net Income | |||||||||
| Less: Dividends Paid | |||||||||
| Retained Earnings 12/31/21 | |||||||||
Expert Answer:
