Check my w Foxx Corporation acquired all of Greenburg Company\'s outstanding sto
ID: 2334272 • Letter: C
Question
Check my w Foxx Corporation acquired all of Greenburg Company's outstanding stock on January 1, 2016, for $614,000 cash. Greenburg's accounting records showed net assets on that date of $457,000, although equipment with a 10-year life was undervalued on the records by $111,000. Any recognized goodwill is considered to have an indefinite life. Greenburg reports net income in 2016 of $94,500 and $143,500 in 2017. The subsidiary declared dividends of $20,000 in each of these two years Account balances for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses. Revenues Cost of goods sold Depreciation expense Investment income $ (828,000) 103,500 328,000 (764,000) 191,000 441,000 (20,000) Net incone $ (416,500) (132,000) Retained earnings, 1/1/18 Net income (1,150, 000) (338,000) (132,000) 20,000 $(1,446,500) (450, 000) (416,500) 120,000 Dividends declared Retained earnings, 12/31/18 Current assets Investment in subsidiary Equipment (net) buiidinga (net) Land $ 323,000 $ 122,000 614,000 1,022,000 874,000 726,000 730, 000 420,000 103,000 Total assets 3,559,000 1,375,000 Liabilities Common stock Retained earnings (1,212,500) (625,000) (300,000) 1:446,500) (450,000) $ (3,559,000) (1,375,000) 900,000) Total liabilities and equity Prev 2 of 13 Next>Explanation / Answer
Part A)
The consolidated balances are calculated as below:
Depreciation Expense = Book Value of Foxx + Book Value of Greenburg + Excess Depreciation on Undervalued Equipment = 328,000 + 441,000 + 111,000/10 = $780,100
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Dividends Declared = Parent's (Foxx) Balance of Dividend Declared = $120,000 (dividends declared by subsidiary get eliminated as a result of intra-entity transfer)
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Revenues = Revenue of Foxx + Revenue of Greenburg = 828,000 + 764,000 = $1,592,000
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Equipment = Book Value of Foxx + Book Value of Greenburg - Excess Depreciation on Undervalued Equipment for the Period 1st January 2016 to 31st December 2018 = 1,022,000 + 730,000 - 3*111,000/10 = $1,718,700
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Buildings = Book Value of Foxx + Book Value of Greenburg = 874,000 + 420,000 = $1,294,000
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Goodwill = Consideration Paid - Book Value of Greenburg's Assets as on 1st January 2016 - Value by which Equipment was Undervalued = 614,000 - 457,000 - 111,000 = $46,000
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Common Stock = Parent's (Foxx) Balance = $900,000
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Tabular Representation:
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Part B)
No, doesn't affect consolidated totals but only the internal reporting of the parent. (which is Option B) [the answer is self-explanatory in nature]
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Part C)
Initial Value Method. (which is Option A)
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Explanation:
Under the initial value method, the value of investment made in the subsidiary is recorded at its initial value. It is not increased or reduce for any amount of current year's income, dividends paid by subsidiary or any amount of amortization. As can be seen from the information provided in the balance sheet that the investment account indicates a value of $614,000 only (which is the same as the consideration transferred at the time of acquiring the common stock on 1st January 2016), it can be concluded that the parent company is using the initial value method of accounting for recording investment in subsidiary.
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Part D)
The value of parent's investment income under partial equity method and equity method is calculated below:
Investment Income (Partial Equity Method) = Same as Greenburg's Income for 2018 = $132,000
Investment Income (Equity Method) = Greenburg's Income for 2018 - Excess Depreciation = 132,000 - 111,000/10 = $120,900
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Part E)
The retained earnings balance as on 1st January 2018 under each method is calculated as below:
Retained Earnings on 1st January 2018 (Initial Value Method) = Same as Foxx's Balance in Retained Earnings as on 1st January 2018 = $1,150,000
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Retained Earnings on 1st January 2018 (Partial Equity Method) = Foxx's Balance in Retained Earnings as on 1st January 2018 + Greenburg's Income for 2016 + Greenburg's Income for 2017 = 1,150,000 + 94,500 + 143,500 = $1,388,000
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Retained Earnings on 1st January 2018 (Equity Method) = Foxx's Balance in Retained Earnings as on 1st January 2018 + Greenburg's Income for 2016 + Greenburg's Income for 2017 - Excess Cost Amortization for 2016 - Excess Cost Amortization for 2017 = 1,150,000 + 94,500 + 143,500 - 11,100 -11,100 = $1,365,800
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Tabular Representation:
Depreciation Expense 780,100 Dividend Declared 120,000 Revenues 1,592,000 Equipment 1,718,700 Buildings 1,294,000 Goodwill 46,000 Common Stock 900,000