Pillow Company holds 70 percent of the common shares of Sheet Corporation. Trial balances for the two companies on December 31, 20X7, are as follows:

At the beginning of 20X7, Pillow held inventory purchased from Sheet containing unrealized profits of $10,000. During 20X7, Pillow purchased $120,000 of inventory from Sheet and on December 31, 20X7, had goods on hand containing $25,000 of unrealized intercompany profit. On December 31, 20X7, Pillow sold equipment to Sheet for $65,000. Pillow had purchased the equipment for $150,000 and had accumulated depreciation of $100,000 on it at the time of sale. The companies file separate tax returns and are subject to a 40 percent income tax rate on all taxable income. Intercompany dividends are 80 percent exempt from taxation.

Required

a. Prepare all consolidation entries needed as of December 31, 20X7, to prepare consolidated financial statements for Pillow Company and its subsidiary.

b. Prepare a consolidation worksheet for 20X7.

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Item Cash Accounts Receivable Inventory Land Buildings & Equipment Patents Investment in Sheet Cost of Goods Sold Depreciation & Amortization Tax Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Wages Payable Bonds Payable Deferred Income Taxes Common Stock ($10 par value) Retained Earnings Sales Income from Sheet Gain on Sale of Equipment Total Pillow Company Debit $ 35,800 130,000 220,000 60,000 450,000 70,000 138,700 435,000 40,000 44,000 11,400 20,000 $1,654,900 Credit $ 150,000 40,000 70,000 200,000 120,000 100,000 370,000 580,000 9,900 15,000 $1,654,900 Sheet Corporation Debit $ 56,000 40,000 60,000 20,000 400,000 210,000 20,000 24,000 10,000 10,000 $850,000 Credit $160,000 30,000 20,000 100,000 40,000 50,000 150,000 300,000 $850,000