Adams, Incorporated, acquires Clay Corporation on January 1, 2023, in exchange for $527,000 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 $448,800. Credit balances are indicated by parentheses. Items Adams Clay Current assets $ 394,000 $ 267,000 Investment in Clay 527,000 0 Equipment 630,800 396,000 Liabilities (286,000) (199,000) Common stock (350,000) (150,000) Retained earnings, 1/1/23 (915,800) (314,000) In 2023, Clay earns a net income of $54,300 and declares and pays a $5,000 cash dividend. In 2023, Adams reports net income from its own operations (exclusive of any income from Clay) of $172,000 and declares no dividends. At the end of 2024, selected account balances for the two companies are as follows: Items Adams Clay Revenues $ (460,000) $ (270,000) Expenses 333,500 202,500 Investment income Not given 0 Retained earnings, 1/1/24 Not given (363,300) Dividends declared 0 8,000 Common stock (350,000) (150,000) Current assets 695,000 335,700 Investment in Clay Not given 0 Equipment 511,300 453,900 Liabilities (226,900) (162,700) Required: What is Adams’s January 1, 2024, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the: Equity value method. Initial value method. What worksheet adjustment to Adams’s January 1, 2024, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method? Prepare the worksheet entry to eliminate Clay’s stockholders’ equity. What is consolidated net income for 2024?

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

ChapterA2: Investments

Section: Chapter Questions

Problem 11MCQ

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Question

Adams, Incorporated, acquires Clay Corporation on January 1, 2023, in exchange for $527,000 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 $448,800. Credit balances are indicated by parentheses.

Items	Adams	Clay
Current assets	$ 394,000	$ 267,000
Investment in Clay	527,000	0
Equipment	630,800	396,000
Liabilities	(286,000)	(199,000)
Common stock	(350,000)	(150,000)
Retained earnings, 1/1/23	(915,800)	(314,000)

In 2023, Clay earns a net income of $54,300 and declares and pays a $5,000 cash dividend. In 2023, Adams reports net income from its own operations (exclusive of any income from Clay) of $172,000 and declares no dividends. At the end of 2024, selected account balances for the two companies are as follows:

Items	Adams	Clay
Revenues	$ (460,000)	$ (270,000)
Expenses	333,500	202,500
Investment income	Not given	0
Retained earnings, 1/1/24	Not given	(363,300)
Dividends declared	0	8,000
Common stock	(350,000)	(150,000)
Current assets	695,000	335,700
Investment in Clay	Not given	0
Equipment	511,300	453,900
Liabilities	(226,900)	(162,700)

Required:

What is Adams’s January 1, 2024, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:
- Equity value method.
- Initial value method.
What worksheet adjustment to Adams’s January 1, 2024, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?
Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.
What is consolidated net income for 2024?

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