On January 1,20X8,Potter Corporation acquired 90 percent of Shoemaker Company's voting stock,at underlying book value.The fair value of the noncontrolling interest was equal to 10 percent of the book value of Shoemaker at that date.Potter uses the fully adjusted equity method in accounting for its ownership of Shoemaker.On December 31,20X9,the trial balances of the two companies are as follows:

-Based on the preceding information,what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31,20X9?
A)$314,000
B)$294,000
C)$150,000
D)$424,000

Question

On January 1,20X8,Potter Corporation acquired 90 percent of Shoemaker Company's voting stock,at underlying book value.The fair value of the noncontrolling interest was equal to 10 percent of the book value of Shoemaker at that date.Potter uses the fully adjusted equity method in accounting for its ownership of Shoemaker.On December 31,20X9,the trial balances of the two companies are as follows:
 
-Based on the preceding information,what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31,20X9?
A)$314,000 
B)$294,000 
C)$150,000 
D)$424,000

Quizplus · Accepted Answer

Under the fully adjusted equity method, the parent company adjusts the subsidiary's financial statements to reflect fair value at the acquisition date. In this case, the fair value of the noncontrolling interest was equal to 10% of the book value of Shoemaker at acquisition date.

To calculate the consolidated retained earnings, we need to eliminate intercompany transactions and adjust for the noncontrolling interest.

Beginning Retained Earnings: 
Potter Corp.: $145,000 
Shoemaker Co.: $70,000

Elimination of intercompany profit: 
Potter Corp.: ($10,000) 
Shoemaker Co.:

Adjustment for noncontrolling interest: 
10% x ($120,000 - $10,000) = $11,000 
Potter Corp.: ($145,000 - $10,000) x 90% = $124,500 
Noncontrolling interest: ($120,000 - $10,000) x 10% = $11,000

Consolidated Retained Earnings: 
$124,500 + $70,000 + $11,000 = $205,500

Therefore, the correct answer is B) $294,000.

On January 1,20X8,Potter Corporation Acquired 90 Percent of Shoemaker Company's