On January 1, 2020, Pinnacle Corporation exchanged $3,544,000 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash Accounts receivable Inventory Buildings (net) Licensing agreements Total assets $ 124,000 366,000 430,000 1,895,000 3,125,000 $ 5,940,000 Accounts payable Long-term debt Common stock Retained earnings $ 450,000 2,675,000 1,500,000 1,315,000 Total liabilities and equity $ 5,940,000 Pinnacle prepared the following fair-value allocation: $ 3,544,000 2,815,000 $ 729,000 Fair value of Strata (consideration transferred) Carrying amount acquired Excess fair value to buildings (undervalued) to licensing agreements (overvalued) to goodwill (indefinite life) $ 380,000 (135,000) 245,000 484,000 $ At the acquisition date, Strata's buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. On December 31, 2021, Strata's accounts payable included an $100,000 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. Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income Retained earnings 1/1/21 Net income Dividends declared Retained Earnings 12/31/21 Cash Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill Total assets Accounts payable Long-term debt Common stock Retained earnings 12/31/21 Total Liabilities and Owner's equity Pinnacle Strata $ (7,585, 000) $ (3,645,000) 4,795,000 2,135,000 334,000 211,000 651,000 409,000 625,000 (40,000) $ (1,845,000) $ (265,000) $ (5,330,000) $ (1,621,000) (1,845,000) (265,000) 550,000 40,000 $ (6,625,000) $ (1,846,000) $ 451,000 $ 512,500 1,655,000 370,000 1,395,000 1,650,000 3,544,000 5,600,000 2,091,000 1,875,000 357,500 $ 13,002,500 $ 6,498,500 $ (412,500) $ (817,500) (2,965,000) (2,335,000) (3,000,000 (1,500,000) (6,625,000) (1,846,000) $(13,002,500) $ (6,498,500) 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?
Complete this question by entering your answers in the tabs below. Required A Required B Required C Prepare a worksheet to consolidate the financial information for these two companies. (For accounts where multiple consolidation entries are required, combine all debit entries into one amount and enter this amount in the debit column of the worksheet. Similarly, combine all credit entries into one amount and enter this amount in the credit column of the worksheet. Amounts in the Debit and Credit columns should be entered as positive. Input all amounts as positive values.) Show less A PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2021 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales Cost of goods sold Interest expense Depreciation expense Amortization expense Dividend income Net income $ (7,585,000) $ (3,645,000) 4,795,000 2,135,000 334,000 211,000 651,000 409,000 625,000 (40,000) $ (1,845,000) $ (265,000) Retained earnings 1/1/21 Net income Dividends declared Retained earnings 12/31/21 (5,330,000) (1,621,000) (1,845,000) (265,000) 550,000 40,000 $ (6,625,000) $ (1,846,000) Cash $ 451,000 $ 512,500 370,000 1,650,000 Accounts receivable Inventory Investment in Strata Buildings (net) Licensing agreements Goodwill 1,655,000 1,395,000 3,544,000 5,600,000 2,091,000 1,875,000 357,500 $ 13,002,500 $ Total assets 6,498,500 Accounts payable Long-term det Common stock - Pinnacle Common stock - Strata Retained earnings 12/31/21 Total Liabilities and Owner's Equity (412,500) (817,500) (2,965,000) (2,3 000) (3,000,000) (1,500,000) (6,625,000) (1,846,000) $(13,002,500) $ (6,498,500) $ 0 $ 0 Required A Required B >
Complete this question by entering your answers in the tabs below. Required A Required B Required C 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. (Input all amounts as positive values.) Amounts 1 Subsidiary income 2 Retained earnings 1/1/21 3 Investment in Strata Required A Required C >
Complete this question by entering your answers in the tabs below. Required A Required B Required C What effect does the parent's internal investment accounting method have on its consolidated financial statements? Effect of parent's internal investment accounting method Require Use of the Equity method increases consolidated assets Use of the Equity method decreases consolidated assets No effect