Preparing a consolidation work .sheet. (Requires coverage of Appendix 11.1.) The preclosing trial balances of Company P and Company S on December 3 1 . Year 2, appear in Exhibit 11.20. 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 S on this date appear below:

During Year 2, Company P sold merchandise costing $32,000, on account, to Company S for $40,000. Of the amount. $12,000 remains unpaid at year-end. Company S sold all of the merchandise during Year 2. Company P declared and paid $40,000 of dividends during Year 2. Company 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