Chapter 3 Exercise 15 (revised) Herbert, Inc. acquired all of Rambis Company’s o
ID: 2489351 • Letter: C
Question
Chapter 3 Exercise 15 (revised)
Herbert, Inc. acquired all of Rambis Company’s outstanding stock on January 1, 2014 for $ 574,000 in cash. Annual excess amortization of $ 12,000 results from this transaction. On the date of the takeover, Herbert reported retained earnings of $ 400,000, and Rambis reported a $ 200,000 balance. Herbert reported internal income of $ 40,000 in 2014 and $ 50,000 in 2015 and paid $ 10,000 in dividends each year. Rambis reported net income of $ 20,000 in 2014 and $ 30,000 in 2015 and paid $ 5,000 in dividends each year.
Assume that Herbert’s internal income figures above do not include any income from the subsidiary. The parent uses the equity method.
A. What is the amount reported as consolidated Retained Earnings on December 31, 2014?
B. What is the amount reported as consolidated Retained Earnings on December 31, 2015?
C. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2014 when the parent uses the equity method?
D. What is the Investment in Rambis account balance on Herbert’s books on January 1, 2015 when the parent uses the equity method?
SHOW YOUR WORK IN COMPUTING THE ABOVE
Explanation / Answer
CONSOLIDATED RETAINED EARNINGS on Dec 31 2014
EQUITY METHOD
Herbert (parent) balance—1/1/14 .................................. $400,000
Herbert income—2014 ................................................... 40,000
Herbert dividends—2014 (subsidiary dividends are intercompany and, thus, eliminated) ....................... (10,000)
Rambis income—2014 (not included in parent's income) 20,000
Amortization—2014........................................................ (12,000)
Herbert income 2015 ................................................... 50,000
Herbert dividends—2015 ................................................ (10,000)
Rambis income—2015 ................................................... 30,000
Amortization—2015 ....................................................... (12,000)
Consolidated Retained Earnings, 12/31/15 ................... $496,000
Investment in Rambis—equity method
Rambis fair value 1/1/14............................................................. $574,000
Rambis income 2014 .................................................................... 20,000
Rambis dividends 2014................................................................ (5,000)
Herbert’s 2014 excess fair over book value amortization ......... (12,000)
Investment account balance 1/1/15 ........................................ $577,000
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