On January 1 2017 Pinnacle Corporation exchanged 3527500 cas

On January 1, 2017, Pinnacle Corporation exchanged $3,527,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:

Cash

$

284,000

Accounts payable

$

383,000

Accounts receivable

311,000

Long-term debt

3,060,000

Inventory

443,000

Common stock

1,500,000

Buildings (net)

1,920,000

Retained earnings

1,205,000

Licensing agreements

3,190,000

$

6,148,000

$

6,148,000

Pinnacle prepared the following fair-value allocation:

Fair value of Strata (consideration transferred)

$

3,527,500

Carrying amount acquired

2,705,000

Excess fair value

$

822,500

to buildings (undervalued)

$

480,000

to licensing agreements (overvalued)

(110,000

)

370,000

to goodwill (indefinite life)

$

452,500

At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable included an $86,600 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.

Pinnacle

Strata

Sales

$

(7,683,000

)

$

(3,328,000

)

Cost of goods sold

4,940,000

1,835,000

Interest expense

338,000

207,000

Depreciation expense

630,000

448,000

Amortization expense

638,000

Dividend income

(35,000

)

Net income

$

(1,810,000

)

$

(200,000

)

Retained earnings 1/1/18

$

(5,160,000

)

$

(1,560,000

)

Net income

(1,810,000

)

(200,000

)

Dividends declared

600,000

35,000

Retained Earnings 12/31/18

$

(6,370,000

)

$

(1,725,000

)

Cash

$

282,000

$

547,000

Accounts receivable

1,255,000

305,000

Inventory

1,295,000

1,565,000

Investment in Strata

3,527,500

Buildings (net)

6,060,000

2,084,000

Licensing agreements

1,914,000

Goodwill

408,000

Total assets

$

12,827,500

$

6,415,000

Accounts payable

$

(337,500

)

$

(950,000

)

Long-term debt

(3,120,000

)

(2,240,000

)

Common stock

(3,000,000

)

(1,500,000

)

Retained earnings 12/31/18

(6,370,000

)

(1,725,000

)

Total Liabilities and OE

$

(12,827,500

)

$

(6,415,000

)

a.     Prepare a worksheet to consolidate the financial information for these two companies.

PINNACLE COMPANY AND SUBSIDIARY STRATA

Consolidation Worksheet

For Year December 31, 2018

Consolidation Entries

Accounts

Pinnacle

Strata

Debit

Credit

Consolidated Totals

Sales

$(7,683,000)

$(3,328,000)

                        

                        

                        

Cost of goods sold

4,940,000

1,835,000

                        

                        

                        

Interest expense

338,000

207,000

                        

                        

                        

Depreciation expense

630,000

448,000

                        

                        

                        

Amortization expense

638,000

                        

                        

                        

Dividend income

(35,000)

                        

                        

                        

Net income

$(1,810,000)

$(200,000)

$0

Retained earnings 1/1/18

(5,160,000)

(1,560,000)

                        

                        

                         

Net income

(1,810,000)

(200,000)

0

Dividends declared

600,000

35,000

                        

                        

                        

Retained earnings 12/31/18

$(6,370,000)

$(1,725,000)

$0

Cash

$282,000

$547,000

                        

                        

                        

Accounts receivable

1,255,000

305,000

                        

                        

                        

Inventory

1,295,000

1,565,000

                         

                        

                        

Investment in Strata

3,527,500

                        

                        

                        

Buildings (net)

6,060,000

2,084,000

                        

                        

                        

Licensing agreements

1,914,000

                        

                         

                        

Goodwill

408,000

                        

                        

                        

Total assets

$12,827,500

$6,415,000

$0

Accounts payable

(337,500)

(950,000)

                        

                        

                        

Long-term debt

(3,120,000)

(2,240,000)

                        

                        

                       

Common stock - Pinnacle

(3,000,000)

                        

                        

                        

Common stock - Strata

(1,500,000)

                        

                        

                        

Retained earnings 12/31/18

(6,370,000)

(1,725,000)

0

Total Liabilities and Owner\'s Equity

$(12,827,500)

$(6,415,000)

$0

$0

$0

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.

1

Subsidiary income

          

2

Retained earnings 1/1/18

                      

3

Investment in Strata

c.      What effect does the parent’s internal investment accounting method have on its consolidated financial statements?

Effect of parent’s internal investment accounting method

Cash	$	284,000			Accounts payable	$	383,000
Accounts receivable		311,000			Long-term debt		3,060,000
Inventory		443,000			Common stock		1,500,000
Buildings (net)		1,920,000			Retained earnings		1,205,000
Licensing agreements		3,190,000
	$	6,148,000				$	6,148,000

Solution

Solution:

a.

b.

Subsidiary income (200,000 – 26,000).......................................$174,000

1/1/18 retained earnings (5,160,000 + 235,000).....................$5,395,000

Investment in Strata:

Initial value basis ..........................................................................................$3,527,500

Conversion to equity as of 1/1/18.........................235,000

Net income for 2018...............................................174,000

Dividends for 2018..................................................(35,000) 374,000

Equity method balance 12/31/18...................................... $3,901,500

c.The internal method choice for investment accounting has no effect on consolidatedfinancial statements.

PINNACLE COMPANY AND SUBSIDIARY STRATA
Consolidation Worksheet
For Year December 31, 2018
			Consolidation Entries
Accounts	Pinnacle	Strata	Debit	Credit	Consolidated Totals
Sales	($7,683,000)	($3,328,000)			($11,011,000)
Cost of goods sold	4,940,000	1,835,000			6,775,000
Interest expense	338,000	207,000			545,000
Depreciation expense	630,000	448,000	48,000		1,126,000
Amortization expense		638,000		22000	616,000
Dividend income	-35,000		35,000		0
Net income	($1,810,000)	($200,000)			($1,949,000)
Retained earnings 1/1/18	-5,160,000	-1,560,000	1,560,000	235,000	-5,395,000
Net income	-1,810,000	-200,000			-2,010,000
Dividends declared	600,000	35,000		35,000	600,000
Retained earnings 12/31/18	($6,370,000)	($1,725,000)			($6,805,000)
Cash	$282,000	$547,000			$829,000
Accounts receivable	1,255,000	305,000		86,600	1,473,400
Inventory	1,295,000	1,565,000			2,860,000
Investment in Strata	3,527,500		235,000	3,084,500	0
				620,500
Buildings (net)	6,060,000	2,084,000	283,000	48,000	8,379,000
Licensing agreements		1,914,000	22000	90500	1,845,500
Goodwill	408,000		452,500		860,500
Total assets	$12,827,500	$6,415,000			$17,655,900
Accounts payable	-337,500	-950,000	86,600		-1,200,900
Long-term debt	-3,120,000	-2,240,000			-5,360,000
Common stock - Pinnacle	-3,000,000				-3,000,000
Common stock - Strata		-1,500,000	1,500,000		0
Retained earnings 12/31/18	-6,370,000	-1,725,000			-8,095,000
Total Liabilities and Owner\'s Equity	($12,827,500)	($6,415,000)	$4,222,100	$4,222,100	($17,655,900)