Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below: $$660,000$300,000\begin{array}{|l|r|r|r|}\hline & \text { Errant Inc. } & \text { Grub Inc. } & \text { Grub Inc. } \\\hline & \text { (carrying value) } & \text { (caryying value) } & \text { (fair value) } \\\hline \text { Cash } & \$ 120,000 & \$ 76,000 & \$ 76,000 \\\hline \text { Accounts Receivable } & \$ 80,000 & \$ 40,000 & \$ 40,000 \\\hline \text { Inventory } & \$ 60,000 & \$ 34,000 & \$ 50,000 \\\hline \text { Equipment (net) } & \$ 400,000 & \$ 80,000 & \$ 70,000 \\\hline \text { Trademark } & & \$ 70,000 & \$ 84,000 \\\hline \text { Total Assets } & \$ 660000 & \$ 300,000 & \\\hline \text { Current Liabilities } & \$ 180,000 & \$ 80,000 & \$ 80,000 \\\hline \text { Bonds Payable } & \$ 320,000 & \$ 60,000 & \$ 64,000 \\\hline \text { Common Shares } & \$ 90,000 & \$ 100,000 & \\\hline \text { Retained Earnings } & \$ 70,000 & \$ 60,000 \\\hline \text { Total Liabilities and Equity } & \$ 660,000 & \$ 300,000 \\\hline\end{array}$ The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.
Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.
If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub) and paid no dividends in 2019, what amount of consolidated retained earnings would appear on Errant's consolidated balance sheet as at December 31, 2019?

A) $60,000.
B) $130,000.
C) $160,000.
D) $300,000.

Question

Errant Inc. purchased 100% of the outstanding voting shares of Grub Inc. for $200,000 on January 1, 2019. On that date, Grub Inc. had common shares and retained earnings worth $100,000 and $60,000, respectively. Goodwill is tested annually for impairment. The balance sheets of both companies, as well as Grub's fair market values on the date of acquisition are disclosed below:    Errant Inc.   Grub Inc.   Grub Inc.   (carrying value)    (caryying value)    (fair value)    Cash  $ 120 , 000 $ 76 , 000 $ 76 , 000  Accounts Receivable  $ 80 , 000 $ 40 , 000 $ 40 , 000  Inventory  $ 60 , 000 $ 34 , 000 $ 50 , 000  Equipment (net)   $ 400 , 000 $ 80 , 000 $ 70 , 000  Trademark  $ 70 , 000 $ 84 , 000  Total Assets  $ 660000 $ 300 , 000  Current Liabilities  $ 180 , 000 $ 80 , 000 $ 80 , 000  Bonds Payable  $ 320 , 000 $ 60 , 000 $ 64 , 000  Common Shares  $ 90 , 000 $ 100 , 000  Retained Earnings  $ 70 , 000 $ 60 , 000  Total Liabilities and Equity  $ 660 , 000 $ 300 , 000 \begin{array}{|l|r|r|r|}\hline  &  	ext { Errant Inc. }  &  	ext { Grub Inc. }  &  	ext { Grub Inc. } \\hline  &  	ext { (carrying value)  }  &  	ext { (caryying value)  }  &  	ext { (fair value)  } \\hline 	ext { Cash }  &  \$ 120,000  &  \$ 76,000  &  \$ 76,000 \\hline 	ext { Accounts Receivable }  &  \$ 80,000  &  \$ 40,000  &  \$ 40,000 \\hline 	ext { Inventory }  &  \$ 60,000  &  \$ 34,000  &  \$ 50,000 \\hline 	ext { Equipment (net)  }  &  \$ 400,000  &  \$ 80,000  &  \$ 70,000 \\hline 	ext { Trademark }  &   &  \$ 70,000  &  \$ 84,000 \\hline 	ext { Total Assets }  &  \$ 660000  &  \$ 300,000  &  \\hline 	ext { Current Liabilities }  &  \$ 180,000  &  \$ 80,000  &  \$ 80,000 \\hline 	ext { Bonds Payable }  &  \$ 320,000  &  \$ 60,000  &  \$ 64,000 \\hline 	ext { Common Shares }  &  \$ 90,000  &  \$ 100,000  &  \\hline 	ext { Retained Earnings }  &  \$ 70,000  &  \$ 60,000 \\hline 	ext { Total Liabilities and Equity }  &  \$ 660,000  &  \$ 300,000 \\hline\end{array}  Cash   Accounts Receivable   Inventory   Equipment (net)    Trademark   Total Assets   Current Liabilities   Bonds Payable   Common Shares   Retained Earnings   Total Liabilities and Equity  ​  Errant Inc.   (carrying value)   $120 , 000 $80 , 000 $60 , 000 $400 , 000 $660000 $180 , 000 $320 , 000 $90 , 000 $70 , 000 $660 , 000 ​  Grub Inc.   (caryying value)   $76 , 000 $40 , 000 $34 , 000 $80 , 000 $70 , 000 $300 , 000 $80 , 000 $60 , 000 $100 , 000 $60 , 000 $300 , 000 ​  Grub Inc.   (fair value)   $76 , 000 $40 , 000 $50 , 000 $70 , 000 $84 , 000 $80 , 000 $64 , 000 ​ ​   The net incomes for Errant and Grub for the year ended December 31, 2019 were $160,000 and $90,000 respectively. Grub paid $9,000 in dividends to Errant during the year. There were no other inter-company transactions during the year. Moreover, an impairment test conducted on December 31, 2019 revealed that the Goodwill should actually have a value of $20,000. Both companies use a FIFO system, and most of Grub's inventory on the date of acquisition was sold during the year. Errant did not declare any dividends during the year.Assume that any difference between the fair values and book values of the equipment, trademark and bonds payable would all be amortized over 10 years.If Errant used the equity method to account for its investment in Grub and had net income of $160,000 from its own operations (before making any entries to reflect its investment in Grub)  and paid no dividends in 2019, what amount of consolidated retained earnings would appear on Errant's consolidated balance sheet as at December 31, 2019?A)  $60,000.B)  $130,000.C)  $160,000.D)  $300,000.

A'mari Weathers · Accepted Answer

Final Answer : D, Explanation :  To calculate the consolidated retained earnings for Errant Inc. as at December 31, 2019, we start with Errant's own retained earnings and adjust for its share of Grub's net income and dividends received from Grub. Errant's retained earnings at the beginning of the year were $70,000. Errant's net income for the year was $160,000. Grub's net income was $90,000, which is fully attributable to Errant since it owns 100% of Grub. However, Grub paid dividends of $9,000, which would reduce the amount added to Errant's retained earnings. The goodwill impairment of $20,000 does not affect the retained earnings directly since it's a balance sheet adjustment. Therefore, the calculation is as follows:Errant's beginning retained earnings: $70,000+ Errant's net income: $160,000+ Grub's net income: $90,000- Dividends received from Grub: ($9,000)= Consolidated retained earnings: $311,000However, the calculation provided does not directly lead to any of the options given. The correct approach involves adjusting for the equity method accounting, where Errant's investment in Grub and its retained earnings would be adjusted for its share of Grub's net income and dividends received. Given the information and the options provided, it seems there might have been a misunderstanding in the calculation process. The correct answer should reflect the consolidation process, including the adjustments for Grub's net income and dividends, but the options provided and the calculation steps do not align perfectly with standard accounting practices for consolidation and equity method adjustments. Given the discrepancy and focusing on the information provided, the closest logical outcome based on standard consolidation procedures would involve adding Errant's net income to its beginning retained earnings and adjusting for Grub's contributions and distributions. However, without precise adjustments for the fair value increments, amortization of the fair value adjustments, and the goodwill impairment, the exact figure is challenging to determine from the provided options. The explanation aimed to follow the logic of consolidation but acknowledges the limitations based on the provided data and options.

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