"Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2013 (credit balances are indicated by parentheses). Michael acquired all of Aaron's outstanding voting stock on January 1, 2009, 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.
Michael Company
Revenues $(610,000)
Cost of Goods Sold $270,000
Amortization Expense $115,000
Dividend Income $(5,000)
Net Income ($230,000)
Retained Earnings 1.1.13 $(880,000)
Net Income (above) $(230,000)
Dividends Paid $90,000
Retained earnings 12/31/13 $(1,020,000)
Cash $110,000
Receivables $280,000
Inventory $560,000
Investment in Aaron Company $470,000
Copyrights $460,000
Royalty Agreements $920,000
Total Assets $2,900,000
Liabilities $(780,000)
Preferred Stock $(300,000)
Common Stock $(500,000)
Additional Paid-In Capital $(300,000)
Retained earnings 12/31/13 $(1,020,000)
Total Liabilities and Equities $(2,900,000)
Aaron Company
Revenues $(370,000)
Cost of Goods Sold $140,000
Amortization Expense $80,000
Dividend Income $0
Net Income ($150,000)
Retained Earnings 1.1.13 $(490,000)
Net Income (above) $(150,000)
Dividends Paid $5,000
Retained earnings 12/31/13 $(635,000)
Cash $15,000
Receivables $220,000
Inventory $280,000
Investment in Aaron Company $0
Copyrights $340,000
Royalty Agreements $380,000
Total Assets $1,235,000
Liabilities $(470,000)
Preferred Stock $0
Common Stock $(100,000)
Additional Paid-In Capital $(30,000)
Retained earnings 12/31/13 $(635,000)
Total Liabilities and Equities $(1,235,000)
On the date of aquisitionm 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 life with no residual value. Additionally, Aaron owned a trademark witg a fair value of $50,000 and a 10-year remaining life that was not reflected on its books.
a) using the preceding information, prepare a consolidation worksheet for these two companies as of december 31, 2013
b) assuming that michael applied the equity method to this investment, what account balances would differ on the parents individual financial statements
c) assuming that michael applied the equity method to this investment, what changes would be necessary in the consolidation entries found on a december 31, 2013 worksheet?
d) assuming that michael applied the equity method to this investment, what changes would be created in the consolidated figures to be reported by this combination?