Question

Use the following information to answer questions 7 and 8

On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. for $481,000 cash. The acquisition-date fair value of the noncontrolling interest was $53,500. At January 1, 2016, Star’s net assets had a total carrying amount of $374,500. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $72,000. Any remaining excess fair value over book value was attributed to a customer list developed by Star (four-year remaining life), but not recorded on its books. Star recorded net income of $63,000 in 2016 and $72,000 in 2017. Each year since the acquisition, Star has declared a $18,000 dividend. At January 1, 2018, Pride’s retained earnings show a $225,000 balance.

Selected account balances for the two companies from their separate operations were as follows:

	Pride			Star
2018 Revenues	$	448,200		$	256,500
2018 Expenses		315,000			175,500

Problem 4-8 (LO 4-4)

Assuming that Pride, in its internal records, accounts for its investment in Star using the equity method, what amount of retained earnings would Pride report on its January 1, 2018 consolidated balance sheet?

Answer 1

In the given question, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. and become parent company of Star Inc as it holds more than 51% shares therefore parent subsidiary relationship exists.

Under the equity method, amount of retained earnings that would be reported by Parent company in its consolidated balance sheet is the amount stand in the stand alone balance sheet of Parent Corporation as on that date.

As on January 1 2018, amount of retained earnings that would be reported by Pride in its consolidated balance sheet is $225,000.