Adams, Inc., acquires Clay Corporation on January 1, 2012, in exchange for $510,000 cash. Immediately after the acquisition, the two companies have the following account balances. Clay's equipment (with a five-year life) is actually worth $440,000. Credit balances are indicated by parentheses.
Adams Clay
Current assets $ 300,000 $ 220,000
Investment in Clay 510,000 0
Equipment 600,000 390,000
Liabilities (200,000) (160,000)
Common stock (350,000) (150,000)
Retained earnings, 1/1/12 (860,000) (300,000)
In 2012, Clay earns a net income of $55,000 and pays a $5,000 cash dividend. In 2012, Adams reports income from its own operations (exclusive of any income from Clay) of $125,000 and declares no dividends. At the end of 2013, selected account balances for the two companies are as follows:
Adams Clay
Revenues $ (400,000) $ (240,000)
Expenses 290,000 180,000
Investment income Not given 0
Retained earnings, 1/1/13 Not given (350,000)
Dividends declared 0 8,000
Common stock (350,000) (150,000)
Current assets 580,000 262,000
Investment in Clay Not given 0
Equipment 520,000 420,000
Liabilities (152,000) (130,000)
a. Determine the investment income for 2013 and the balance in Investment in Clay account as on December 31, 2013 assuming that Adams uses the:
Investment
Income Investment
in Clay
Equity method $ $
Initial value method $ $
b. How does the parent's internal investment accounting method choice affect the amount reported for expenses in its December 31, 2013, consolidated income statement?
Consolidated expenses if equity method is used $
Consolidated expenses if initial value method is used $
Consolidated expenses if partial equity method is used $
c. How does the parent's internal investment accounting method choice affect the amount reported for equipment in its December 31, 2013, consolidated balance sheet?
Consolidated equipment if equity method is used $
Consolidated equipment if initial value method is used $
Consolidated equipment if partial equity method is used $
d. What is Adams's January 1, 2013, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:
Retained Earnings
Equity method $
Initial value method $
e. What worksheet adjustment to Adams's January 1, 2013, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?
General Journal Debit Credit
f. Prepare the worksheet entry as on December 31, 2013 to eliminate Clay's stockholders' equity.
General Journal Debit Credit
g. What is consolidated net income for 2013?
Consolidated net income $