On January 1, 2017, Pinnacle Corporation exchanged $3,527,500 cash for 100 percent of the outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following balance sheet: Cash $ 284,000 Accounts payable $ 383,000 Accounts receivable 311,000 Long-term debt 3,060,000 Inventory 443,000 Common stock 1,500,000 Buildings (net) 1,920,000 Retained earnings 1,205,000 Licensing agreements 3,190,000 $ 6,148,000 $ 6,148,000 Pinnacle prepared the following fair-value allocation: Fair value of Strata (consideration transferred) $ 3,527,500 Carrying amount acquired 2,705,000 Excess fair value $ 822,500 to buildings (undervalued) $ 480,000 to licensing agreements (overvalued) (110,000 ) 370,000 to goodwill (indefinite life) $ 452,500 At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable included an $86,600 current liability owed to Pinnacle. Strata Corporation continues its separate legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records. Pinnacle employs the initial value method in its internal accounting for its investment in Strata. The separate financial statements for the two companies for the year ending December 31, 2018, follow. Credit balances are indicated by parentheses. Pinnacle Strata Sales $ (7,683,000 ) $ (3,328,000 ) Cost of goods sold 4,940,000 1,835,000 Interest expense 338,000 207,000 Depreciation expense 630,000 448,000 Amortization expense 638,000 Dividend income (35,000 ) Net income $ (1,810,000 ) $ (200,000 ) Retained earnings 1/1/18 $ (5,160,000 ) $ (1,560,000 ) Net income (1,810,000 ) (200,000 ) Dividends declared 600,000 35,000 Retained Earnings 12/31/18 $ (6,370,000 ) $ (1,725,000 ) Cash $ 282,000 $ 547,000 Accounts receivable 1,255,000 305,000 Inventory 1,295,000 1,565,000 Investment in Strata 3,527,500 Buildings (net) 6,060,000 2,084,000 Licensing agreements 1,914,000 Goodwill 408,000 Total assets $ 12,827,500 $ 6,415,000 Accounts payable $ (337,500 ) $ (950,000 ) Long-term debt (3,120,000 ) (2,240,000 ) Common stock (3,000,000 ) (1,500,000 ) Retained earnings 12/31/18 (6,370,000 ) (1,725,000 ) Total Liabilities and OE $ (12,827,500 ) $ (6,415,000 ) a. Prepare a worksheet to consolidate the financial information for these two companies. PINNACLE COMPANY AND SUBSIDIARY STRATA Consolidation Worksheet For Year December 31, 2018 Consolidation Entries Accounts Pinnacle Strata Debit Credit Consolidated Totals Sales $(7,683,000) $(3,328,000) Cost of goods sold 4,940,000 1,835,000 Interest expense 338,000 207,000 Depreciation expense 630,000 448,000 Amortization expense 638,000 Dividend income (35,000) Net income $(1,810,000) $(200,000) $0 Retained earnings 1/1/18 (5,160,000) (1,560,000) Net income (1,810,000) (200,000) 0 Dividends declared 600,000 35,000 Retained earnings 12/31/18 $(6,370,000) $(1,725,000) $0 Cash $282,000 $547,000 Accounts rec.

1. On January 1, 2017, Pinnacle Corporation exchanged $3,527,500 cash for 100 percent of the
outstanding voting stock of Strata Corporation. On the acquisition date, Strata had the following
balance sheet:
Cash
$
284,000
Accounts payable
$
383,000
Accounts receivable
311,000
Long-term debt
3,060,000
Inventory
443,000
Common stock
1,500,000
Buildings (net)
1,920,000
Retained earnings
1,205,000
Licensing agreements
3,190,000
$
6,148,000
$
6,148,000
Pinnacle prepared the following fair-value allocation:
Fair value of Strata (consideration transferred)
$
3,527,500
Carrying amount acquired
2,705,000
Excess fair value

2. $
822,500
to buildings (undervalued)
$
480,000
to licensing agreements (overvalued)
(110,000
)
370,000
to goodwill (indefinite life)
$
452,500
At the acquisition date, Strata’s buildings had a 10-year remaining life and its licensing
agreements were due to expire in 5 years. At December 31, 2018, Strata’s accounts payable
included an $86,600 current liability owed to Pinnacle. Strata Corporation continues its separate
legal existence as a wholly owned subsidiary of Pinnacle with independent accounting records.
Pinnacle employs the initial value method in its internal accounting for its investment in Strata.
The separate financial statements for the two companies for the year ending December 31, 2018,
follow. Credit balances are indicated by parentheses.
Pinnacle
Strata
Sales
$
(7,683,000
)
$
(3,328,000
)
Cost of goods sold
4,940,000
1,835,000
Interest expense
338,000
207,000
Depreciation expense
630,000

3. 448,000
Amortization expense
638,000
Dividend income
(35,000
)
Net income
$
(1,810,000
)
$
(200,000
)
Retained earnings 1/1/18
$
(5,160,000
)
$
(1,560,000
)
Net income
(1,810,000
)
(200,000
)
Dividends declared
600,000
35,000
Retained Earnings 12/31/18
$
(6,370,000
)
$
(1,725,000
)
Cash

4. $
282,000
$
547,000
Accounts receivable
1,255,000
305,000
Inventory
1,295,000
1,565,000
Investment in Strata
3,527,500
Buildings (net)
6,060,000
2,084,000
Licensing agreements
1,914,000
Goodwill
408,000
Total assets
$
12,827,500
$
6,415,000
Accounts payable
$
(337,500
)
$
(950,000
)
Long-term debt
(3,120,000
)
(2,240,000
)

5. Common stock
(3,000,000
)
(1,500,000
)
Retained earnings 12/31/18
(6,370,000
)
(1,725,000
)
Total Liabilities and OE
$
(12,827,500
)
$
(6,415,000
)
a. Prepare a worksheet to consolidate the financial information for these two companies.
PINNACLE COMPANY AND SUBSIDIARY STRATA
Consolidation Worksheet
For Year December 31, 2018
Consolidation Entries
Accounts
Pinnacle
Strata
Debit
Credit
Consolidated Totals
Sales
$(7,683,000)
$(3,328,000)
Cost of goods sold
4,940,000

6. 1,835,000
Interest expense
338,000
207,000
Depreciation expense
630,000
448,000
Amortization expense
638,000
Dividend income
(35,000)
Net income
$(1,810,000)
$(200,000)
$0
Retained earnings 1/1/18
(5,160,000)
(1,560,000)

7. Net income
(1,810,000)
(200,000)
0
Dividends declared
600,000
35,000
Retained earnings 12/31/18
$(6,370,000)
$(1,725,000)
$0
Cash
$282,000
$547,000
Accounts receivable
1,255,000
305,000
Inventory
1,295,000
1,565,000
Investment in Strata
3,527,500

8. Buildings (net)
6,060,000
2,084,000
Licensing agreements
1,914,000
Goodwill
408,000
Total assets
$12,827,500
$6,415,000
$0
Accounts payable
(337,500)
(950,000)
Long-term debt
(3,120,000)
(2,240,000)
Common stock - Pinnacle
(3,000,000)

9. Common stock - Strata
(1,500,000)
Retained earnings 12/31/18
(6,370,000)
(1,725,000)
0
Total Liabilities and Owner's Equity
$(12,827,500)
$(6,415,000)
$0
$0
$0
b. Compute the following amounts that would appear on Pinnacle’s 2018 separate
(nonconsolidated) financial records if Pinnacle’s investment accounting was based on the equity
method.
Subsidiary income.
Retained earnings, 1/1/18.
Investment in Strata.
1
Subsidiary income
2
Retained earnings 1/1/18
3
Investment in Strata
c. What effect does the parent’s internal investment accounting method have on its
consolidated financial statements?
Effect of parent’s internal investment accounting method

10. Cash
$
284,000
Accounts payable
$
383,000
Accounts receivable
311,000
Long-term debt
3,060,000
Inventory
443,000
Common stock
1,500,000
Buildings (net)
1,920,000
Retained earnings
1,205,000
Licensing agreements
3,190,000
$
6,148,000
$
6,148,000
Solution