Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1
ID: 2592618 • Letter: H
Question
Haynes, Inc., obtained 100 percent of Turner Company’s common stock on January 1, 2017, by issuing 10,400 shares of $10 par value common stock. Haynes’s shares had a $15 per share fair value. On that date, Turner reported a net book value of $117,000. However, its equipment (with a five-year remaining life) was undervalued by $7,100 in the company’s accounting records. Also, Turner had developed a customer list with an assessed value of $31,900, although no value had been recorded on Turner’s books. The customer list had an estimated remaining useful life of 10 years.
The following balances come from the individual accounting records of these two companies as of December 31, 2017:
The following balances come from the individual accounting records of these two companies as of December 31, 2018:
a. What balance does Haynes’s Investment in Turner account show on December 31, 2018, when the equity method is applied?
b. What is the consolidated net income for the year ending December 31, 2018?
c-1. What is the consolidated equipment balance as of December 31, 2018?
c-2. Would this answer be affected by the investment method applied by the parent?
d. Prepare entry *C for the beginning of the Retained Earnings account on a December 31, 2018 by using initial value, partial equity and equity method.
d1. Prepare entry *C if the parent used the initial value method on 12/31/2018
d2. Prepare entry *C if the parent used the partial equity method on 12/31/2018.
d3. Prepare entry *C if the parent used the equity method.
Haynes Turner Revenues $ (670,000 ) $ (388,000 ) Expenses 478,000 202,000 Investment income Not given 0 Dividends declared 100,000 90,000Explanation / Answer
a. An allocation of the acquisition price (based on the fair value of the shares Issued) must be made first.
Acquisition fair value (consideration paid by Haynes). $156,000
Book value equivalency ....................................................... (117,000)
Excess of Turner fair value over book value .................. $ 39,000
Excess fair value assigned to specific Annual excess
accounts based on fair value Life amortizations
Equipment ............................. $7,100 5 yrs. $1,420
Customer List ......................... 31,900 10 yrs. 3,190
$4,610
Acquisition fair value............................................................. $156,000
2017 Income accrual ............................................................. 186,000
2017 Dividends paid by Turner .......................................... (90,000)
2017 Amortizations (above) ................................................. (4,610)
2018 Income accrual ............................................................. 204,150
2018 Dividends paid by Turner .......................................... (70,000)
2018 Amortizations ................................................................ (4,610)
Investment in Turner account balance ............................ $220,930
b. Net income of Haynes .......................................................... $303,300
Net Income of Turner ............................................................ 204,150
Depreciation expense............................................................ (1,420)
Amortization expense............................................................ (3,190)
Consolidated net income 2018 ..................................... $502,840
c. Equipment balance Haynes ................................................ $511,000
Equipment balance Turner ................................................. 313,000
Allocation based on fair value (above) ............................. 7,100
Depreciation for 20172018 ................................................. (2,840)
Consolidated equipment—December 31, 2018.............. $828,260
Parent's choice of an investment method has no impact on consolidated totals.
d. If the initial value method was applied during 2017, the parent would have recorded dividend income of $90,000 rather than $186,000 (as equity income). Net income is, therefore, understated by $96,000. In addition, amortization expense of $4,610 was not recorded. Thus, the January 1, 2018, retained earnings is understated by $91,390 ($96,000 – $4,610). An Entry *C is necessary on the worksheet to correct this equity figure:
Investment in Turner ................................................. 91,390
Retained Earnings, 1/1/18 (Haynes) ................ 91,390
If the partial equity method was applied during 2017, the parent would have failed to record amortization expense of $4,600. Retained earnings are overstated by $4,600 and are corrected through Entry *C:
Retained Earnings, 1/1/18 (Haynes) ...................... 4,610
Investment in Turner ........................................... 4,610
If the equity method was applied during 2017, the parent's retained earnings are the same as the consolidated figure so that no adjustment is necessary.
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