Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses. Adams Clay Current assets $ 382,000 $ 272,000 Investment in Clay 713,300 0 Equipment 837,000 584,000 Liabilities (202,000 ) (224,000 ) Common stock (350,000 ) (150,000 ) Retained earnings, 1/1/20 (1,380,300 ) (482,000 ) In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows: Adams Clay Revenues $ (544,000 ) $ (286,000 ) Expenses 394,400 214,500 Investment income Not given 0 Retained earnings, 1/1/21 Not given (551,100 ) Dividends declared 0 8,000 Common stock (350,000 ) (150,000 ) Current assets 756,000 322,400 Investment in Clay Not given 0 Equipment 756,500 622,400 Liabilities (149,800 ) (189,800 ) a) What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the: Equity value method. Initial value method. b) What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method? c) Prepare the worksheet entry to eliminate Clay’s stockholders’ equity. d) What is consolidated net income for 2021?

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter13: Investments And Long-term Receivables

Section: Chapter Questions

Problem 8MC

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Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses.

	Adams		Clay
Current assets	$	382,000		$	272,000
Investment in Clay		713,300			0
Equipment		837,000			584,000
Liabilities		(202,000	)		(224,000	)
Common stock		(350,000	)		(150,000	)
Retained earnings, 1/1/20		(1,380,300	)		(482,000	)

In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows:

	Adams	Clay
Revenues	$	(544,000	)	$	(286,000	)
Expenses		394,400			214,500
Investment income		Not given			0
Retained earnings, 1/1/21		Not given			(551,100	)
Dividends declared		0			8,000
Common stock		(350,000	)		(150,000	)
Current assets		756,000			322,400
Investment in Clay		Not given			0
Equipment		756,500			622,400
Liabilities		(149,800	)		(189,800	)

a) What is Adams’s January 1, 2021, Retained Earnings account balance assuming Adams accounts for its investment in Clay using the:

Equity value method.

Initial value method.

b) What worksheet adjustment to Adams’s January 1, 2021, Retained Earnings account balance is required if Adams accounts for its investment in Clay using the initial value method?

c) Prepare the worksheet entry to eliminate Clay’s stockholders’ equity.

d) What is consolidated net income for 2021?

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