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Retained Earnings Calculations

Herbert, Inc., buys all of the outstanding stock of Rambis Company on January 1, 2003, for $574,000. Annual excess amortization of $12,000 results from this purchase transaction. On the date of the takeover, Herbert reported retained earnings of $400,000 while Rambis reported a $200,000 balance. Herbert reported internal income of $40,000 in 2003 and $50,000 in 2004 and paid $10,000 in dividends each year. Rambis reported net income of $20,000 in 2003 and $30,000 in 2004 and paid $5,000 in dividends each year.

A. Assume that Herbert's internal income does not include any income derived from the subsidiary.
? If the parent uses the equity method, what is the amount of consolidated Retained Earnings on December 31, 2004?
? If the parent uses the partial equity method, what is the amount of consolidated Retained Earnings on December 31, 2004?
? If the parent uses the cost method, what is the amount of consolidated Retained Earnings on December 31, 2004?
B. Under each of the following situations, what is the Investment in Rambis account balance on Herbert's books on January 1, 2004?
- The parent uses the equity method.
- The parent uses the partial equity method.
- The parent uses the cost method.
C. Under each of the following situations, what is Entry *C on a 2004 consolidation worksheet?
- The parent uses the equity method.
- The parent uses the partial equity method.
- The parent uses the cost method.
*An Entry *C is required to update the beginning Retained Earnings of the parent as if the equity method had been applied. Both an income accrual as well as excess amortizations for the prior two years must be recognized since these balances were not recorded by the parent.

Solution Summary

The solution shows how to retain earnings calculations for Herbet, Inc.

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