Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses.     Adams   Clay   Current assets $ 382,000   $ 272,000   Investment in Clay   713,300     0   Equipment   837,000     584,000   Liabilities   (202,000 )   (224,000 ) Common stock   (350,000 )   (150,000 ) Retained earnings, 1/1/20   (1,380,300 )   (482,000 )     In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:      Adams Clay Revenues $ (544,000 ) $ (286,000 ) Expenses   394,400     214,500   Investment income   Not given     0   Retained earnings, 1/1/21   Not given     (551,100 ) Dividends declared   0     8,000   Common stock   (350,000 )   (150,000 ) Current assets   756,000     322,400   Investment in Clay   Not given     0   Equipment   756,500     622,400   Liabilities   (149,800 )   (189,800 )   a) What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the: Equity value method. Initial value method. b) What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method? c) Prepare the worksheet entry to eliminate Clay’s stockholders’ equity. d) What is consolidated net income for 2021?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses.

 

  Adams   Clay  
Current assets $ 382,000   $ 272,000  
Investment in Clay   713,300     0  
Equipment   837,000     584,000  
Liabilities   (202,000 )   (224,000 )
Common stock   (350,000 )   (150,000 )
Retained earnings, 1/1/20   (1,380,300 )   (482,000 )
 

 

In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:

  

  Adams Clay
Revenues $ (544,000 ) $ (286,000 )
Expenses   394,400     214,500  
Investment income   Not given     0  
Retained earnings, 1/1/21   Not given     (551,100 )
Dividends declared   0     8,000  
Common stock   (350,000 )   (150,000 )
Current assets   756,000     322,400  
Investment in Clay   Not given     0  
Equipment   756,500     622,400  
Liabilities   (149,800 )   (189,800 )
 

a) What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

Equity value method.

Initial value method.

b) What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

c) Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

d) What is consolidated net income for 2021?

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