Question

Paste Corporation acquired 70 percent of Stick Company's stock on January 1, 20X9, for $105,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Stick Company. The companies reported the following stockholders’ equity balances immediately after the acquisition:

	Paste Corporation				Stick Company
Common Stock		$	120,000			$	30,000
Additional Paid-in Capital			230,000				80,000
Retained Earnings			290,000				40,000
Total		$	640,000			$	150,000

Paste and Stick reported 20X9 operating incomes of $90,000 and $35,000 and dividend payments of $30,000 and $10,000, respectively.

Required:
a. Compute the amount reported as net income by each company for 20X9, assuming Paste uses equity-method accounting for its investment in Stick.
  

	Paste	Stick
Net income

b. Compute consolidated net income for 20X9.
  

Net Income

c. Compute the reported balance in retained earnings at December 31, 20X9, for both companies.

	Paste	Stick
Retained Earnnings

d. Compute consolidated retained earnings at December 31, 20X9.
  

Consolidated Retained Earnings

Answer 1

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Part a
	Paste	Stick
Operating income	$         90,000	$       35,000
Income from subsidiary $35,000*70%	$         24,500
Net income	$       114,500	$       35,000
Part b
Consolidated net income is $125,000 ($90,000 + $35,000).
c. Retained earnings reported at December 31, 20X9:
	Paste	Stick
Retained earnings, January 1, 20X9	$       290,000	$       40,000
Net income for 20X9	$       114,500	$       35,000
Dividends paid in 20X9	$       (30,000)	$     (10,000)
Retained earnings, December 31, 20X9	$       374,500	$       65,000
Part d
Consolidated Retained Earning	$       374,500
(Retained earning reported by Paste)