Question

Assessment 1: Accounting for Equity Investments

Exercise 3 Worksheet: Consolidated Balances

On January 1, 2015, Pueblo Corporation purchased all of Spartan Company’s outstanding stock for $1,200,000 cash. On that date, Spartan’s accounting records showed net assets of $940,000, even though equipment, with a life of 10 years, was undervalued on the books by $180,000. The life of recognized goodwill is considered to be indefinite. Spartan reported $180,000 net income in 2015 and $200,000 in 2016. The subsidiary paid dividends of $40,000 for each year. Financial figures are shown in Table 1 below for the year ending December 31, 2017. Credit balances are indicated in parentheses.

Table 1: Financial Figures for Year Ending December 31, 2017
Account	Pueblo	Spartan
Revenues	$    (1,600,000)	$                 (1,200,000)
Cost of goods sold	$         200,000	$                      300,000
Depreciation expense	$         600,000	$                      700,000
Investment income	$         (40,000)	$                                 -
Net income	$       (840,000)	$                    (200,000)
Dividends paid	$         240,000	$                        40,000
Retained earnings, December 31, 2017	$    (2,800,000)	$                    (800,000)
Current assets	$         600,000	$                      200,000
Investment in subsidiary	$      1,200,000	$                                 -
Equipment (net)	$      1,800,000	$                   1,200,000
Buildings (net)	$      1,600,000	$                      800,000
Land	$      1,200,000	$                      200,000
Total assets	$      6,400,000	$                   2,400,000
Liabilities	$    (1,800,000)	$                 (1,000,000)
Common stock	$    (1,800,000)	$                    (600,000)
Retained earnings	$    (2,800,000)	$                    (800,000)
Total liabilities and equity	$    (6,400,000)	$                 (2,400,000)

5. For each of the accounting methods listed below, determine Pueblo’s retained earnings balance as of January 1, 2017.
Method		Balance
Initial value method		$
Partial equity method		$
Equity method		$

Answer 1

Method	Balance	Calculation
Initial Value Method	$1960000	Bal as on 31 Dec 2017: $2800000 (-)Income of P :               $840000 (-) Income of S :               $200000 (-)Dividend From S:         $540000 (+) Dividend paid by P:   $240000 Balance as on 1 Jan2017:- $1960000
Partial Equity Method	$1760000	Bal as on 31 Dec 2017: $2800000 (-)Income of P :              $840000 (-) Income of S:               $200000 Balance as on 1 Jan2017:- $1760000
Equity Method	0