Preparing a consolidation work sheet. (Requires coverage of Appendix 11.1.) The preclosing trial balances of Company P and Company S on December 31, Year 2, appear in Exhibit 11.17. Company P acquired 100 percent of the common stock of Company S on January 2, Year 2, for \(\$ 240,000\). The shareholders' equity accounts of Company \(\mathrm{S}\) on this date appear below:

During Year 2, Company P sold merchandise costing \(\$ 32,000\), on account, to Company \(\mathrm{S}\) for \(\$ 40,000\). Of the amount, \(\$ 12,000\) remains unpaid at year-end. Company \(\mathrm{S}\)

sold all of the merchandise during Year 2. Company P declared and paid \(\$ 40,000\) of dividends during Year 2. Company \(\mathrm{S}\) did not declare or pay a dividend during Year 2.

a. Prepare a consolidation work sheet for Company P and Company S for Year 2. The adjustments and eliminations columns should contain entries to (1) eliminate the investment account, (2) eliminate intercompany sales, and (3) eliminate intercompany receivables and payables.

b. Prepare a consolidated statement of income and retained earnings for Year 2 and a consolidated balance sheet as of December 31, Year 2.

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Common Shares.... Retained Earnings Total $ 80,000 160,000 $240,000