On January 1, 2020, Pinnacle Corporation exchanged $3,568,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash $ 145,000 Accounts payable $ 453,000 Accounts receivable 356,000 Long-term debt 3,110,000 Inventory 432,000 Common stock 1,500,000 Buildings (net) 2,145,000 Retained earnings 1,365,000 Licensing agreements 3,350,000 Total assets $ 6,428,000 Total liabilities and equity $ 6,428,000 Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) $ 3,568,500 Carrying amount acquired 2,865,000 Excess fair value $ 703,500 to buildings (undervalued) $ 328,000 to licensing agreements (overvalued) (101,000 ) 227,000 to goodwill (indefinite life) $ 476,500 At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata’s accounts payable included an $100,600 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, 2021, follow. Credit balances are indicated by parentheses. Pinnacle Strata Sales $ (7,595,000 ) $ (3,383,000 ) Cost of goods sold 4,880,000 1,810,000 Interest expense 318,000 178,000 Depreciation expense 612,000 445,000 Amortization expense 670,000 Dividend income (35,000 ) Net income $ (1,820,000 ) $ (280,000 ) Retained earnings 1/1/21 $ (5,200,000 ) $ (1,679,600 ) Net income (1,820,000 ) (280,000 ) Dividends declared 600,000 35,000 Retained Earnings 12/31/21 $ (6,420,000 ) $ (1,924,600 ) Cash $ 272,000 $ 401,600 Accounts receivable 1,420,000 295,000 Inventory 1,445,000 1,680,000 Investment in Strata 3,568,500 Buildings (net) 5,925,000 2,280,000 Licensing agreements 2,010,000 Goodwill 402,000 Total assets $ 13,032,500 $ 6,666,600 Accounts payable $ (542,500 ) $ (887,000 ) Long-term debt (3,070,000 ) (2,355,000 ) Common stock (3,000,000 ) (1,500,000 ) Retained earnings 12/31/21 (6,420,000 ) (1,924,600 ) Total Liabilities and Owner's equity $ (13,032,500 ) $ (6,666,600 ) Prepare a worksheet to consolidate the financial information for these two companies. Compute the following amounts that would appear on Pinnacle’s 2021 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/21. Investment in Strata.

On January 1, 2020, Pinnacle Corporation exchanged $3,568,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash $ 145,000 Accounts payable $ 453,000 Accounts receivable 356,000 Long-term debt 3,110,000 Inventory 432,000 Common stock 1,500,000 Buildings (net) 2,145,000 Retained earnings 1,365,000 Licensing agreements 3,350,000 Total assets $ 6,428,000 Total liabilities and equity $ 6,428,000 Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) $ 3,568,500 Carrying amount acquired 2,865,000 Excess fair value $ 703,500 to buildings (undervalued) $ 328,000 to licensing agreements (overvalued) (101,000 ) 227,000 to goodwill (indefinite life) $ 476,500 At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata’s accounts payable included an $100,600 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, 2021, follow. Credit balances are indicated by parentheses. Pinnacle Strata Sales $ (7,595,000 ) $ (3,383,000 ) Cost of goods sold 4,880,000 1,810,000 Interest expense 318,000 178,000 Depreciation expense 612,000 445,000 Amortization expense 670,000 Dividend income (35,000 ) Net income $ (1,820,000 ) $ (280,000 ) Retained earnings 1/1/21 $ (5,200,000 ) $ (1,679,600 ) Net income (1,820,000 ) (280,000 ) Dividends declared 600,000 35,000 Retained Earnings 12/31/21 $ (6,420,000 ) $ (1,924,600 ) Cash $ 272,000 $ 401,600 Accounts receivable 1,420,000 295,000 Inventory 1,445,000 1,680,000 Investment in Strata 3,568,500 Buildings (net) 5,925,000 2,280,000 Licensing agreements 2,010,000 Goodwill 402,000 Total assets $ 13,032,500 $ 6,666,600 Accounts payable $ (542,500 ) $ (887,000 ) Long-term debt (3,070,000 ) (2,355,000 ) Common stock (3,000,000 ) (1,500,000 ) Retained earnings 12/31/21 (6,420,000 ) (1,924,600 ) Total Liabilities and Owner's equity $ (13,032,500 ) $ (6,666,600 ) Prepare a worksheet to consolidate the financial information for these two companies. Compute the following amounts that would appear on Pinnacle’s 2021 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method. Subsidiary income. Retained earnings, 1/1/21. Investment in Strata.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cash	$	145,000	Accounts payable	$	453,000
Accounts receivable		356,000	Long-term debt		3,110,000
Inventory		432,000	Common stock		1,500,000
Buildings (net)		2,145,000	Retained earnings		1,365,000
Licensing agreements		3,350,000
Total assets	$	6,428,000	Total liabilities and equity	$	6,428,000

Pinnacle prepared the following fair-value allocation:


Fair value of Strata (consideration transferred)				$	3,568,500
Carrying amount acquired					2,865,000
Excess fair value				$	703,500
to buildings (undervalued)	$	328,000
to licensing agreements (overvalued)		(101,000	)		227,000
to goodwill (indefinite life)				$	476,500

At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata’s accounts payable included an $100,600 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, 2021, follow. Credit balances are indicated by parentheses.

	Pinnacle		Strata
Sales	$	(7,595,000	)	$	(3,383,000	)
Cost of goods sold		4,880,000			1,810,000
Interest expense		318,000			178,000
Depreciation expense		612,000			445,000
Amortization expense					670,000
Dividend income		(35,000	)
Net income	$	(1,820,000	)	$	(280,000	)
Retained earnings 1/1/21	$	(5,200,000	)	$	(1,679,600	)
Net income		(1,820,000	)		(280,000	)
Dividends declared		600,000			35,000
Retained Earnings 12/31/21	$	(6,420,000	)	$	(1,924,600	)
Cash	$	272,000		$	401,600
Accounts receivable		1,420,000			295,000
Inventory		1,445,000			1,680,000
Investment in Strata		3,568,500
Buildings (net)		5,925,000			2,280,000
Licensing agreements					2,010,000
Goodwill		402,000
Total assets	$	13,032,500		$	6,666,600
Accounts payable	$	(542,500	)	$	(887,000	)
Long-term debt		(3,070,000	)		(2,355,000	)
Common stock		(3,000,000	)		(1,500,000	)
Retained earnings 12/31/21		(6,420,000	)		(1,924,600	)
Total Liabilities and Owner's equity	$	(13,032,500	)	$	(6,666,600	)

Prepare a worksheet to consolidate the financial information for these two companies.
Compute the following amounts that would appear on Pinnacle’s 2021 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.