On January 1, 2017, Pinnacle Corporation exchanged $3,347,500 cash for 100 percent of the outstanding voting...

   

Transcribed Image Text:

On January 1, 2017, Pinnacle Corporation exchanged $3,347,500 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 $ 146,000 374,000 397,000 2,045,000 3,225,000 $ 6,187,000 Accounts payable Long-term debt Common stock Retained earnings Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 422,000 3,085,000 1,500,000 1,180,000 $ 6,187,000 $ 352,000 (124,000) $ 3,347,500 2,680,000 $ 667,500 228,000 $ 439,500 December 31, 2018, Strata's accounts payable included an $94,400 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. 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 $ (7,563,000) $ (3,351,000) 4,845,000 1,880,000 322,000 681,000 $ $ (60,000) $ (1,775,000) $ (230,000) $ (5,165,000) $ (1,462,400) (1,775,000) 500,000 (6,440,000) $ (1,632,400) 250,000 $ 243,000 353,000 645,000 1,240,000 1,495,000 3,347,500 5,990,000 (230,000) 60,000 378,400 360,000 1,570,000 2,219,000 1,935,000. 360,000 $ 12,682,500 $ 6,462,400 $ (467,500) $ (895,000) (2,775,000) (2,435,000) (3,000,000) (1,500,000) (6,440,000) (1,632,400) $(12,682,500) $ (6,462,400) 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? On January 1, 2017, Pinnacle Corporation exchanged $3,347,500 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 $ 146,000 374,000 397,000 2,045,000 3,225,000 $ 6,187,000 Accounts payable Long-term debt Common stock Retained earnings Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 422,000 3,085,000 1,500,000 1,180,000 $ 6,187,000 $ 352,000 (124,000) $ 3,347,500 2,680,000 $ 667,500 228,000 $ 439,500 December 31, 2018, Strata's accounts payable included an $94,400 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. 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 $ (7,563,000) $ (3,351,000) 4,845,000 1,880,000 322,000 681,000 $ $ (60,000) $ (1,775,000) $ (230,000) $ (5,165,000) $ (1,462,400) (1,775,000) 500,000 (6,440,000) $ (1,632,400) 250,000 $ 243,000 353,000 645,000 1,240,000 1,495,000 3,347,500 5,990,000 (230,000) 60,000 378,400 360,000 1,570,000 2,219,000 1,935,000. 360,000 $ 12,682,500 $ 6,462,400 $ (467,500) $ (895,000) (2,775,000) (2,435,000) (3,000,000) (1,500,000) (6,440,000) (1,632,400) $(12,682,500) $ (6,462,400) 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?

Answer rating: 100% (QA)

Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income ... View the full answer