On January 1, 2010, Perez Company purchased 90% of the capital stock of Sanchez Company for $85,000. Sanchez Company had capital stock of $70,000 and retained earnings of $12,000 at that time. On December 31, 2014, the trial balances of the two companies were:

Any difference between book value and the value implied by the purchase price relates to goodwill.

Required:
A. What method is being used by Perez to account for its investment in Sanchez Company?
How can you tell?
B. Prepare a workpaper for the preparation of consolidated financial statements on12/31/14.

Transcribed Image Text:

Perez Sanchez 13,000 22,000 14,000 8,000 85,000 50,000 17,800 10,000 84,000 10,000 $313,800 14,000 36,000 8,000 Cash Accounts receivable Inventory, 1/1 Advance to Sanchez Company Investment in Sanchez Company Plant and equipment Land Dividends declared Purchases Other expense 44,000 6,000 12,000 20,000 16,000 $156,000 Total debits 6,000 6,000 7,000 Accounts payable Other liabilities Advance from Perez Company Capital stock Retained earnings Sales Dividend income 100,000 50,000 110,000 10,800 $313,800 40,000 8,000 70,000 30,000 42,000 Total credits Inventory, 12/31 $156,000 15.000