Padilla Company acquired 90% of the outstanding common stock of Sanchez Company on June 30, 2024, for $426,000. On that date, Sanchez Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was equal to their book value. The excess of implied over fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Sanchez Company, which had an expected remaining useful life of five years from June 30, 2024. Financial data for 2026 are presented here:

On December 31, 2024, Padilla Company sold equipment (with an original cost of $100,000 and accumulated depreciation of $50,000) to Sanchez Company for $97,500. This equipment had been depreciated at an annual rate of 20% of the purchase price. During 2025, Sanchez Company sold land to Padilla Company at a profit of $15,000. The inventory of Padilla Company on December 31, 2025, included goods purchased from Sanchez Company on which Sanchez Company recognized a profit of $7,500. During 2026, Sanchez Company sold goods to Padilla Company for $375,000, of which $60,000 was unpaid on December 31, 2026. The December 31, 2026, inventory of Padilla Company included goods acquired from Sanchez Company on which Sanchez Company recognized a profit of $10,500.

Required:
A. Prepare a consolidated financial statements workpaper for the year ended December 31, 2026.
B. Prepare a schedule to calculate consolidated retained earnings on December 31, 2026, using an analytical or t- account approach.

Transcribed Image Text:

Sales Equity in Subsidiary Income Total Revenue Cost of Goods Sold Expenses Total Cost and Expense Net Income 1/1 Retained Earnings Net Income Dividends Declared 12/31 Retained Earnings Cash Accounts Receivable Inventory Other Current Assets Land Investment in Sanchez Company Property and Equipment Accumulated Depreciation Total Assets Padilla Company $2,555,500 160,650 2,716,150 1,730,000 654,500 2,384,500 $ 331,650 666,550 331,650 (100,000) $ 898,200 $ 119,500 342,000 362,000 40,500 150,000 604,200 825,000 (207,000) $2,236,200 Sanchez Company $1,120,000 1,120,000 690,500 251,000 941,500 $ 178,500 139,500 178,500 (60,000) $ 258,000 $ 132,500 125,000 201,000 13,000 241,000 (53,500) $ 659,000