Question

Adams, Inc., acquires Clay Corporation on January 1, 2017, in exchange for $514,400 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $463,800. Credit balances are indicated by parentheses.

	Adams			Clay
Current assets	$	372,000		$	250,000
Investment in Clay		514,400			0
Equipment		700,800			396,000
Liabilities		(229,000	)		(209,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/17		(1,008,200	)		(287,000	)

In 2017, Clay earns a net income of $78,900 and declares and pays a $5,000 cash dividend. In 2017, Adams reports net income from its own operations (exclusive of any income from Clay) of $126,000 and declares no dividends. At the end of 2018, selected account balances for the two companies are as follows:

	Adams			Clay
Revenues	$	(550,000	)	$	(340,000	)
Expenses		398,750			255,000
Investment income		Not given			0
Retained earnings, 1/1/18		Not given			(360,900	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		717,000			298,600
Investment in Clay		Not given			0
Equipment		606,300			449,100
Liabilities		(172,300	)		(159,200	)

a. What are the December 31, 2018, Investment Income and Investment in Clay account balances assuming Adams uses the:

Equity method, Initial value method.

b. How does the parent’s internal investment accounting method choice affect the amount reported for expenses in its December 31, 2018, consolidated income statement?

c. How does the parent’s internal investment accounting method choice affect the amount reported for equipment in its December 31, 2018, consolidated balance sheet?

d. What is Adams’s January 1, 2018, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

Equity value method, Initial value method.

e. What worksheet adjustment to Adams’s January 1, 2018, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

f. Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

g. What is consolidated net income for 2018?

a.

	Investment Income	Investment in Clay
Equity method
Initial value method

b.

	Investment Income	Investment in Clay
Equity method
Initial value method

Answer 1

b.

The reported consolidated balances are not affected by the parent's investment accounting method. Thus, consolidated expenses are the

Same regardless of whether the equity method, the partial equity method, or the initial value method is applied by Adams

c.

The reported consolidated balances are not affected by the parent's investment accounting method. Thus, consolidated equipment (1137480=$700800 + $396000 + allocation of $67,800 - two years of excess depreciation totalling $27120) is the same regardless of whether the equity method or the initial value method is applied by Adams.