Pell Company purchased 75% of the stock of Silk Company on January 1, 2007, for $1,860,000, an amount equal to 560,000 in excess of the book value of equity acquired. All book values were equal to fair values at the time of purchase (i.e.. any excess payment relates to subsidiary goodwill). On the date of purchase, Silk Company's retained earnings balance was $200,000. The remainder of the stockholders' equity consists of no-par common stock. During 2011, Silk Company declared dividends in the amount of $40,000, and reported net income of $160,000. The retained earnings balance of Silk Company on December 31, 2010 was $640,000. No impairment of goodwill was recognized between the date of acquisition and December 31, 2011.
Required:
Prepare in general journal form the work paper entries that would be made in the preparation of a consolidated statements work paper on December 31, 2011. Assuming that
1 Pell Company uses the equity method to record its investment.
2. Pell Company uses the cost method to record its investment (optional).