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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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 )
 

 

  1. Prepare a worksheet to consolidate the financial information for these two companies.
  2. 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.
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. (Input all amounts as positive values.)
Amounts
1 Subsidiary income
2 Retained earnings 1/1/21
3 Investment in Strata
< Required A
Required C
>
Transcribed Image Text: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. (Input all amounts as positive values.) Amounts 1 Subsidiary income 2 Retained earnings 1/1/21 3 Investment in Strata < Required A Required C >
Show less A
PINNACLE COMPANY AND SUBSIDIARY STRATA
Consolidation Worksheet
For Year December 31, 2021
Consolidation Entries
Consolidated
Accounts
Pinnacle
Strata
Debit
Credit
Totals
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 - Pinnacle
(3,000,000)
Common stock - Strata
(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) $
2$
Transcribed Image Text:Show less A PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Consolidation Entries Consolidated Accounts Pinnacle Strata Debit Credit Totals 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 - Pinnacle (3,000,000) Common stock - Strata (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) $ 2$
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