Question

On January 1, 2016, Pride Corporation purchased 90 percent of the outstanding voting shares of Star, Inc. for $456,000 cash. The acquisition-date fair value of the noncontrolling interest was $50,600. At January 1, 2016, Star’s net assets had a total carrying amount of $354,200. Equipment (eight-year remaining life) was undervalued on Star’s financial records by $51,200. 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 $44,800 in 2016 and $51,200 in 2017. Each year since the acquisition, Star has declared a $12,800 dividend. At January 1, 2018, Pride’s retained earnings show a $160,000 balance.

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

	Pride			Star
2018 Revenues	$	318,800		$	182,500
2018 Expenses		224,200			124,900

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?

Multiple Choice

• $160,000.

• $229,500.

• $183,500.

• $303,600.

Answer 1

Answer:

Option A is Correct i.e $160,000.

Calculate the amount of Retained Earnings
that would report on january 1, 2018 consolidated balance sheet under equity menthod.

We know that,

under Equity Method, Consolidated Retained earnings are equal to the Parent's company's retained Earnings

(i.e Pride corporation's retained earnings.)

It is given that consolidated Retained earnings are $160,000.
So the parent company i.e., Pride Company wil report the same on january 1, 2018 consolidated balancee sheet.