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Foxx Corporation acquired all of Greenburg Company's outstanding stock on January 1, 2011,

for $600,000 cash. Greenburg's accounting records showed net assets on that date of 5470,000,
although equipment with a 10year life was undervalued on the records by 590,000. Any
recognized goodwill is considered to have an indefinite life. Greenburg reports net Income In
2011 of $90,000 and $100,000 in 2012. The subsidiary paid dividends of $20000 in each of these
two years. Financial figures for the year ending December 31, 2013, follow. Credit balances are
indicated by parentheses.

a. Determine the December 31. 2013. consolidated balance for each of the following accounts:
Depreciation Expense Buildings Dividends Paid Goodwill Revenues Common Stock Equipment
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 earrings as of January 1. 2013. if each of the
following methods had been in use?
Initial value method
Partial equity method
Equity method

SOLUTION

a. Acquisition-Date Fair value allocation and amortization:


CONSOLIDATED BALANCES
Depreciation expense = $659,000 (book values plus $9,000 excess depreciation)
Dividends Paid = $120,000
(parent balance only. Subsidiary's dividends are eliminated as intercompany
transfer)
Revenues = $1,400,000 (add book values)
Equipment = $1,563,000 (add book values plus $90,000 allocation less three years
of excess depreciation [$27,000])
Buildings = $1,200,000 (add book values)
Goodwill = $40,000 (original residual allocation)
Common Stock = $900,000 (parent balance only)

b. The parent's choice of an investment method has no impact on the consolidated totals.
The choice of an investment method only affects the internal reporting of the parent.

c. The initial value method is used. The parent's Investment in Subsidiary account still
retains the original consideration transferred of $600,000. In addition, the Investment
Income account equals the amount of dividends paid by the subsidiary.

d. If the partial equity method had been utilized, the investment income account would have
shown an equity accrual of $100000. If the equity method had been applied, the
investment Income account would have included both the equity accrual of $100000 and
excess amortizations of $9000 for a balance of $91000.

e.