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Calculations Based on Account Balances

21. Jefferson, Inc., purchases Hamilton Corporation on January 1, 2004. Immediately after the acquisition, the two companies have the following account balances. Hamilton's equipment (with a five year life) is actually worth \$450,000. Any goodwill is considered to have an indefinite life.

Jefferson Hamilton
Current assets . . . . . . . . . . . . . . . . . . . \$300,000 \$210,000
Investment in Hamilton . . . . . . . . . . . . 510,000
Equipment . . . . . . . . . . . . . . . . . . . . . 600,000 400,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . 200,000 160,000
Common stock . . . . . . . . . . . . . . . . . . 350,000 150,000
Retained earnings . . . . . . . . . . . . . . . . 860,000 300,000

In 2004, Hamilton earns a net income of \$55,000 and pays a \$5,000 cash dividend. At the end of 2005, selected account balances for the two companies are as follows:

Jefferson Hamilton
Revenues . . . . . . . . . . . . . . . . . . . . . . \$400,000 \$240,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . 290,000 180,000
Investment income . . . . . . . . . . . . . . . not given
Retained earnings, 1/1/05 . . . . . . . . . . not given 350,000
Common stock . . . . . . . . . . . . . . . . . . 350,000 150,000
Current assets . . . . . . . . . . . . . . . . . . . 360,000 140,000
Investment in Hamilton . . . . . . . . . . . . not given
Equipment . . . . . . . . . . . . . . . . . . . . . 520,000 420,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . 170,000 190,000

a. What will be the December 31, 2005, balance in the Investment Income account and the Investment in Hamilton account under each of the three methods described in this chapter?
b. How is the consolidated Expense account affected by the accounting method used by the parent to record ownership of this subsidiary?
c. How is the consolidated Equipment account affected by the accounting method used by the parent to record ownership of this subsidiary?
d. What is Jefferson's Retained Earnings balance as of January 1, 2005, under each of the three methods described in this chapter?
e. What is Entry *C on a consolidation worksheet for 2005 under each of the three methods described in this chapter?
f. What is Entry S on a consolidation worksheet for 2005 under each of the three methods described in this chapter?
g. What is consolidated net income for 2005?

Solution Summary

This solution involves various calculations for various questions involving a company's account balance.

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