Question

Hammock Inc. acquired all of the common stock that was outstanding of Iceberg Company on 1/1/16. As a result of this acquisition, there will be annual amortization in the amount of $55,000. Hammock reported a retained earnings balance of $510,000 and Iceberg reported a retained earnings balance of $145,000 on the date of acquisition. In addition, Hammock had net income for 2016 in the amount of $95,000 and net income for 2017 in the amount of $105,000. Hammock also paid dividends in the amount of $40,000 both in 2016 and 2017. Iceberg had net income for 2016 in the amount of $50,000 and net income for 2017 in the amount of $60,000. In addition, Iceberg paid dividends in the amount of $8,000 both in 2016 and 2017.

Assume that Hammock includes the Equity in Subsidiary income in their reported net income. If Hammock uses the partial equity method for net income, what are the consolidated retained earnings on 12/31/17?

Answer 1

Hammock’s Retained Earnings on Jan. 1, 2016		510,000
Add: Net income of Hammock for 2016	95,000
Less: Dividend paid by Hammock for 2016	(40,000)	55,000
Add: Net income of Iceberg for 2016	50,000
Less: Amortization-2016	(55,000)	(5,000)
Consolidated Retained Earnings on Dec. 31, 2016		560,000
Add: Net income of Hammock for 2017	105,000
Less: Dividend paid by Hammock for 2017	(40,000)	65,000
Add: Net income of Iceberg for 2017	60,000
Less: Amortization-2017	(55,000)	5000
Consolidated Retained Earning on Dec. 31, 2017		630,000

Dividend from Icerberg to Hammock is inter-company transfer, hence eliminated.