Foxx Corporation acquired all of Greenburg Company’s outstanding stock on January 1, 2019, for $600,000 cash. Greenburg’s accounting records showed net assets on that date of $470,000, although equipment with a 10-year remaining life was undervalued on the records by $90,000. Any recognized goodwill is considered to have an indefinite life.
Greenburg reports net income in 2019 of $90,000 and $100,000 in 2020. The subsidiary declared dividends of $20,000 in each of these two years.
Account balances for the year ending December 31, 2021, follow. Credit balances are indicated by parentheses.
a. Determine the December 31, 2021, consolidated balance for each of the following accounts:
- Depreciation Expense
- Dividends Declared
- Revenues
- Equipment
- Buildings
- Goodwill
- Common Stock
b. How does the parent’s choice of an accounting method for its investment affect the balances computed in requirement (a)?
c. Which method of accounting for this subsidiary is the parent actually using for internal reporting purposes?
d. If the parent company had used a different method of accounting for this investment, how could that method have been identified?
e. What would be Foxx’s balance for retained earnings as of January 1, 2021, if each of the following methods had been in use?
- Initial value method
- Partial equity method
- Equity method
