Problem 3-29 (LO 3-1, 3-3a, 3-3b, 3-4)

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 per share.

	Michael Company 12/31/18				Aaron Company 12/31/18
Revenues	$	(742,000	)		$	(510,000	)
Cost of goods sold		336,000				210,000
Amortization expense		128,400				101,000
Dividend income		(5,000	)			0
Net income	$	(282,600	)		$	(199,000	)
Retained earnings, 1/1/18	$	(908,000	)		$	(777,000	)
Net income (above)		(282,600	)			(199,000	)
Dividends declared		90,000				5,000
Retained earnings, 12/31/18	$	(1,100,600	)		$	(971,000	)
Cash	$	150,000			$	15,400
Receivables		432,000				313,000
Inventory		576,000				293,000
Investment in Aaron Company		680,000				0
Copyrights		477,000				346,000
Royalty agreements		934,000				466,000
Total assets	$	3,249,000			$	1,433,400
Liabilities	$	(1,048,400	)		$	(332,400	)
Preferred stock		(300,000	)			0
Common stock		(500,000	)			(100,000	)
Additional paid-in capital		(300,000	)			(30,000	)
Retained earnings, 12/31/18		(1,100,600	)			(971,000	)
Total liabilities and equity	$	(3,249,000	)		$	(1,433,400	)

On the date of acquisition, Aaron reported retained earnings of $440,000 and a total book value of $570,000. 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?