On January 1, 2019, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc., for $612,000 cash. The acquisition-date fair value of the noncontrolling interest was $68,000. At January 1, 2019, Star’s net assets had a total carrying amount of $476,000. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $71,200. 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 $62,300 in 2019 and $71,200 in 2020. Each year since the acquisition, Star has declared a $17,800 dividend. At January 1, 2021, Pride’s retained earnings show a $222,500 balance.
Selected account balances for the two companies from their separate operations were as follows:
a) What is consolidated net income for 2021?
b) 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, 2021, consolidated balance sheet?
Excess fair value over book value = 612,000 + 68,000 - 476,000 = 204,000
Amortization of equipment = 71,200/8 = 8,900
Amortization of customer list = (204,000 - 71,200)/4 = 33,200
Total excess amortization = 33,200 + 8,900 = 42,100
Consolidated net income = (443,300 + 253,800) - (311,800+173,700+42,100) = 169,500
The amount of retained earnings would pride report on its January 1,2021 consolidated balance sheet ,
Retained earnings $222,500
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