On January 1, 2020, Pinnacle Corporation exchanged $3,200,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet:
Pinnacle prepared the following fair-value allocation:
At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in five years. On December 31, 2021, Strata’s accounts payable included an $85,000 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata. The separate financial statements for the two companies for the year ending December 31, 2021, follow. Credit balances are indicated by parentheses.
a. Prepare a worksheet to consolidate the financial information for these two companies.
b. Compute the following amounts that would appear on Pinnacle’s 2021 separate (nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity method.
∙ Subsidiary income.
∙ Retained earnings, 1/1/21.
∙ Investment in Strata.
c. What effect does the parent’s internal investment accounting method have on its consolidated financial statements?
