Question

In: Accounting

On May 1, 2020, Peters Company purchased 80% of the common stock of Smith Company for...

On May 1, 2020, Peters Company purchased 80% of the common stock of Smith Company for $50,000. Additional data concerning these two companies for the years 2020 and 2021 are:

2020 2021
Peters Smith Peters Smith
Common stock $100,000 $25,000 $100,000 $25,000
Other contributed capital 40,000 10,000 40,000 10,000
Retained earnings, 1/1 80,000 10,000 129,000 53,000
Net income (loss) 64,000 45,000 37,500 (5,000)
Cash dividends (11/30) 15,000 2,000 5,000 —0—

Any difference between book value and the value implied by the purchase price relates to Smith Company's land. Peters Company uses the cost method to record its investment.

Required:

  1. Prepare the workpaper entries that would be made on a consolidated statements workpaper for the years ended December 31, 2020 and 2021 for Peters Company and its subsidiary, assuming that Smith Company's income is earned evenly throughout the year.
  2. Calculate consolidated net income and consolidated retained earnings for 2020 and 2021

Solutions

Expert Solution

Explanation:

Answer a

The journal entries for the purpose of consolidation are as follows

Answer b

Consolidated net income and retained earnings for 2020 and 2021 are as follows

Calculation of consolidated net income 2020 2021

Net Income 64,000 37,500

Add: Net income of smith    30,000 (45,000*8/12) (5,000)

Less: Dividend income from smith (1,600) -

Total consolidated income 92,400 32,500

Consolidated net income attributable to

owners 86,400 33,500

Minority shareholders 6,000(30,000*0.2) (1,000)

Calculation of Consolidated retained earnings    2020 2021

Opening retained earnings 80,000 151,000

Add: peter's net income for the year     64,000 37,500

add: share in net income of smith post acquisition @80%    24,000(30,000*0.8) (4,000)

Less: dividend declared by peter (15,000) (5,000)

Less: dividend declared by smith (2,000) -

Consolidated retained earnings    151,000 179,500

ekkarill92 answered 1 year ago
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