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Haynes, Inc., obtained 100 percent of Turner Company's common stock on January 1, 2017, by issuing 8,500 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 $88,750. However, its equipment (with a five-year remaining life) was undervalued by $7,250 in the company's accounting records. Also, Turner had developed a customer list with an assessed value of $31,500, 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
Revenues $ (692,000 ) $ (275,000 )
Expenses 449,000 130,000
Investment income Not given 0
Dividends declared 120,000 70,000
The following balances come from the individual accounting records of these two companies as of December 31, 2018:
Haynes Turner
Revenues $ (886,000 ) $ (348,750 )
Expenses 471,200 163,100
Investment income Not given 0
Dividends declared 140,000 50,000
Equipment 532,000 373,000
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.

1 Answer

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Haynes and Turner Consolidated Financial Statements (Equity Method)

a) Investment in Turner:

Initial investment: 8,500 shares * $15/share = $127,500

Turner's net income 2017: $145,000 ($275,000 - $130,000)

Turner's net income 2018: $185,650 ($348,750 - $163,100)

Dividends received: $120,000 + $140,000 = $260,000

Investment in Turner on Dec 31, 2018: $127,500 + $145,000 + $185,650 - $260,000 = $298,150

b) Consolidated net income:

Haynes net income 2018: $886,000 - $471,200 = $414,800

Turner net income 2018: $185,650

Haynes' share of Turner's income (100%): $185,650

Consolidated net income: $414,800 + $185,650 = $600,450

c-1) Consolidated equipment:

Haynes equipment: $532,000

Turner equipment: $373,000

Adjustment for undervaluation: $7,250

Amortization for 2 years: 2 years * 1/5 * $7250 = $2,900

Consolidated equipment: $532,000 + $373,000 + $7,250 - $2,900 = $899,350

c-2) Not affected:

The consolidated equipment balance is not affected by the investment method used by the parent. It is based on the sum of the individual equipment balances adjusted for any necessary adjustments.

d) Entry for beginning Retained Earnings (Equity method):

Debit:

Investment in Turner: $298,150

Retained Earnings (Haynes): $182,700 (Haynes' beginning retained earnings + net income - dividends)

Credit:

Retained Earnings (Consolidated): $480,850

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