Pueblo Corporation acquired all of Spartan Company’s outstanding stock on January 1, 2018, for $1,320,000 cash. Spartan’s accounting records reflected net assets on that date of $1,034,000, although equipment with a 10-year life was undervalued on the records by $198,000. Any recognized goodwill is considered to have an indefinite life.
Spartan reports net income in 2018 of $198,000 and $220,000 in 2019. The subsidiary paid dividends of $44,000 in each of these two years.
Financial figures for the year ending December 31, 2020, follow. Credit balances are indicated by parentheses.
Pueblo Spartan
Revenues. $(1,760,000) $(1,320,000)
Cost of goods sold 220,000 330,000
Depreciation expense. 660,000 770,000
Investment income. . (44,000) –0–
Net income $(924,000) $(220,000)
Retained earnings 1/1/20 . . $(2,420,000) $(704,000)
Net income (924,000) (220,000)
Dividends paid 264,000 44,000
Retained earnings, 12/31/17 $(3,080,000) $(880,000)
Current assets. $660,000 $220,000
Investment in subsidiary 1,320,000 –0–
Equipment (net) 1,980,000 1,320,000
Buildings (net) 1,760,000 880,000
Land. 1,320,000 220,000
Total assets $7,040,000 $2,640,000
Liabilities. $(1,980,000) $(1,100,000)
Common stock. (1,980,000) (660,000)
Retained earnings . . (3,080,000) (880,000)
Total liabilities and equity. $(7,040,000) $(2,640,000)
Complete the following:
a. Determine the December 31, 2020, consolidated balance for each of the following accounts:
• Depreciation Expense
• Dividends Paid
• Revenues
• Equipment
• Buildings
• Goodwill
• Common Stock
b. How does the parent’s choice of an accounting method for its investment affect the balances computed in requirement (a)?
c. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
d. If the parent company had used a different method of accounting for this investment, how could that method have been identified?
e. What would be Pueblo’s balance for retained earnings as of January 1, 2020, if each of the following methods had been in use?
• Initial value method
• Partial equity method
• Equity method