Top Company acquired all of Bottom Company’s outstanding common stock for $842,000 in cash. As of that date, one of Bottom’s buildings with a 12 year remaining life was undervalued on its financial records by $72,000. Equipment with a 10 year life was undervalued, but only by $10,000. The book values of all of Bottom’s other assets and liabilities were equal to their fair values at that time except for an unrecorded licensing agreement with an assessed value of $40,000 and a 20 year remaining useful life. Bottom’s book value at the acquisition date was $720,000.
During 2011, Bottom reported net income of $100,000 and paid $30,000 in dividends. Earnings were $120,000 in 2012 with $20,000 in dividends distributed by the subsidiary. As of December 31, 2013, the companies reported the following selected balances, which include all revenues and expenses for the year:
|
Top Company |
Bottom Company |
||
|
Debit |
Credit |
Debit |
Credit |
|
Buildings |
$1,540,000 |
$460,000 |
|
|
Cash and receivables |
50,000 |
90,000 |
|
|
Common stock |
$900,000 |
$400,000 |
|
|
Dividends paid |
70,000 |
10,000 |
|
|
Equipment |
280,000 |
200,000 |
|
|
Cost of goods sold |
500,000 |
120,000 |
|
|
Depreciation expense |
100,000 |
60,000 |
|
|
Inventory |
280,000 |
260,000 |
|
|
Land |
330,000 |
250,000 |
|
|
Liabilities |
480,000 |
260,000 |
|
|
Retained earnings, 1/1/13 |
1,360,000 |
490,000 |
|
|
Revenues |
900,000 |
300,000 |
Required
a. If Top applies the equity method, what is its investment account balance as of December 31, 2013?
b. If Top applies the initial value method, what is its investment account balance as of December 31, 2013?
c. Regardless of the accounting method in use by Top, what are the consolidated totals as of December 31, 2013, for each of the following accounts?
|
Buildings |
Revenues |
|
Equipment |
Net Income |
|
Land |
Investment in Bottom |
|
Depreciation Expense |
Dividends Paid |
|
Amortization Expense |
Cost of Goods Sold |
d. Prepare the worksheet entries required on December 31, 2013, to consolidate the financial records of these two companies. Assume that Top applied the equity method to its investment account.
e. How would the worksheet entries in requirement (d) be altered if Top has used the initial value method?