Reference no: EM131881793
Problem
On January1, 2017 Pinnacle Corporation exchanged $3,808,500 cash for 100 % of the outstanding voting stock of Strata Corporation. On the acquistion date, Strata had the following balance sheet: Cash $95,000; Accounts Receivable $316,00; Inventory $406,000; Buildings (net) $2,245,000; Licensing agreements $3,195,000; Accounts payable $370,000; Long term debt $2,825,000; Common stock $1,500,000; Retained earnings $1,560,000
Pinnacle perpared the following fair value allocation.
Fair value of Strata (consideration transferred) $3,808,500
Carrying amount acquired 3,060,000
Excess fair value _$748,500__
to buildings (undervalued) $438,000
to licensing agreements (overvalued (131,000) $307,000
to goodwill (indefinite life) $441,500
At the acquisition date, Strata's buildings has a 10 year remaining life and its licensing agreements were due to expire in 5 years. As December 31, 2018, Strata's accounts payable included an $84,000 current liability owed to Pinnacle. Strata Corporation continues as a seperate 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 seperate financial statements for the two companies for the year end December 31, 2018, follow. Credit balances are indicated by parentheses.
Pinnacle Strata
Sales $ (7,412,000) $ (3,572,000)
Cost of goods sold 4,740,000 2,195,000
Interest expense 307,000 168,000
Depreciation expense 610,000 352,000
Amortization expense 639,000
Dividend income (50,000)
Net income $ 1,805,000 $(218,000)
Retained earnings 1/1/18 (5,500,000) (1,877,600)
Net income (1,805,000) (218,000)
Dividends declared 560,000 50,000
Retained earnings 12/31/18 (6,745,000) (2,045,600)
Cash 281,500 403,100
Accounts receivable 1,525,000 217,500
Inventory 1,280,000 1,665,000
Investment in Strate 3,808,500
Buildings (net) 5,605,000 2,465,000
Licensing agreements 1,917,000
Goodwill 570,000
Total assets $13,070,000 $6,667,600
Accounts payable $(365,000) $(832,000)
Long term debt (2,960,000) (2,290,000)
Common stock (3,000,000) (1,500,000)
Retained earnings 12/31/18 (6,745,000) (2,045,600)
Total liabilities and OE $(13,070,000) $(6,667,600)
Prepare a worksheet to consolidate the financial information for these two companies.
Compute the following amounts that would appear on Pinnacle's 2018 seperate (nonconsolidated) financial records if Pinnacle's investment accounting was based on the equity method.
* Subsidiary income
* Retained earnings 1/1/18
* Investment in Strata.