Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2021 (credit balances indicated by parentheses). Michael acquired all of Aaron’s outstanding voting stock on January 1, 2017, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company’s stock actively traded at $23.50 per share.
On the date of acquisition, Aaron reported retained earnings of $230,000 and a total book value of $360,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year remaining life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books. Aaron declared and paid dividends in the same period.
a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2021.
b. Instead of the initial value method, assume now that Michael applies the equity method to its Investment in Aaron account. What account balances would the parent’s individual financial statements then show for the Equity in Subsidiary Earnings, Retained Earnings, and Investment in Aaron accounts?
c. Assuming that Michael applied the equity method to this investment, how would the consolidation entries differ on a December 31, 2021, worksheet?
d. Assuming that Michael applied the equity method to this investment, how would the December 31, 2021, reported consolidated balances differ?
