Time, Inc., obtains 100 percent of Second Company's common stock on January 1, 2010, by issuing 9,000 shares of $10 par value common stock. Time's shares had a $15 per share fair market value. On that date, Second reported a net book value of $100,000. However, its equipment.with a five-year remaining life) was undervalued by $5,000 in the compa¬ny's accounting records. Any "goodwill" would be amortized over 10 years.
The following figures come from the individual accounting records of these two companies as of December 31, 2010:
Time Second
Revenues $600,000 $230,000
Expenses 440,000 120,000
Investment Income not given -
Dividends Paid 80,000 50,000
The following figures come from the individual accounting records of these two companies as of December 31, 2011:
Time Second
Revenues $700,000 $280,000
Expenses 460,000 150,000
Investment Income not given -
Dividends Paid 90,000 40,000
Equipment 500,000 300,000
Retained Earnings,
12/31/11 Balance 800,000 180,000
Required:
a. What balance does Time's Invest¬ment in Second account show on December 31, 2011, when the equity method is applied? Ditto for the partial equity method? Ditto, again, for the cost method?
b. What is the consolidated net income for the year ending December 31, 2011?
c. What are the consolidated equipment and consolidated goodwill as of December 31, 2011? How would this answer be affected by the investment method applied by the parent?
d. If Time has applied the equity method to account for its investment, what are consolidated retained earnings as of December 31, 2011? How would this answer be changed if Time had used the partial equity approach?
e. If Time has applied the cost method to account for its investment, what adjustment is needed to beginning retained earnings on a December 31, 2011, consolidation worksheet? How would this answer change if the partial equity method had been in use? How would this answer change if the equity method had been in use?