Following are separate financial statements of Michael Company and Aaron Company as of December 31, 2013 (credit balances indicated by parentheses). Michael acquired all of Aaron’s outstanding voting stock on January 1, 2009, by issuing 20,000 shares of its own $1 par common stock. On the acquisition date, Michael Company’s stock actively traded at $23.50 per share.

Company 12/31/13	Company 12/31/13
Revenues	($610,000)	($370,000)
Cost of goods sold	270,000	140,000
Amortizations expense	115,000	80,000
Dividend income	-5,000	–0–
Net income	($230,000)	($150,000)
Retained earnings, 1/1/13	($880,000)	($490,000)
Net income (above)	230,000	-150,000
Dividends paid	90,000	5,000
Retained earnings, 12/31/13	($1,020,000)	($635,000)
Cash	$110,000	$15,000
Receivables	380,000	220,000
Inventory	560,000	280,000
Investment in Aaron Company	470,000	–0–
Copyrights	460,000	340,000
Royalty agreements	920,000	380,000
Total assets	$2,900,000	$1,235,000
Liabilities	($780,000)	($470,000)
Preferred stock	300,000	–0–
Common stock	500,000	100,000
Additional paid-in capital	300,000	30,000
Retained earnings, 12/31/13.	1,020,000	635,000
Total liabilities and equity	($2,900,000)	($1,235,000)

On the date of acquisition, Aaron reported retained earnings of $230,000 and a total book value of $360,000. At that time, its royalty agreements were undervalued by $60,000. This intangible was assumed to have a six-year life with no residual value. Additionally, Aaron owned a trademark with a fair value of $50,000 and a 10-year remaining life that was not reflected on its books.

a. Using the preceding information, prepare a consolidation worksheet for these two companies as of December 31, 2013.

b. Assuming that Michael applied the equity method to this investment, what account balances would differ on the parent’s individual financial statements?

c. Assuming that Michael applied the equity method to this investment, what changes would be necessary in the consolidation entries found on a December 31, 2013, worksheet?

d. Assuming that Michael applied the equity method to this investment, what changes would be created in the consolidated figures to be reported by this combination?