Deferred Taxes, Intercompany Sales of Inventory, Cost Method Peck Corporation owns 70% of the common stock of Seacrest Company. The stock was purchased for $420,000 on January 1, 2000, when Seacrest Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2004, are presented here: LO5 Peck Corporation Seacrest Company Cash $ 35,000 $ 100,000 Accounts Receivable (net) 211,000 107,750 Inventory—1/1 150,000 110,000 Investment in Seacrest Company 420,000 Other Assets 500,000 400,000 Dividends Declared 100,000 10,000 Purchases 850,000 350,000 Other Expenses 180,000 114,000 Income Tax Expense 27,000 28,250 Total $2,473,000 $1,220,000 Peck Corporation Seacrest Company Accounts Payable $ 70,000 $ 30,000 Other Liabilities 55,000 35,000 Deferred Tax Liability 20,000 5,000 Common Stock 680,000 500,000 Retained Earnings 541,000 120,000 Sales 1,100,000 530,000 Dividend Income 7,000 Total $2,473,000 $1,220,000 Inventory—12/31 $140,000 $115,000 The January 1, 2004, inventory of Peck Corporation includes $10,000 of profit recorded by Seacrest Company on 2003 sales. During 2004, Seacrest Company made intercompany sales of $100,000 with a markup of 25% on cost. The ending inventory of Peck Corporation includes goods purchased in 2004 from Seacrest Company for $40,000.
The affiliates file separate tax returns, and the prior, current, and expected future marginal income tax rates for both companies are 40%. Dividends received from Seacrest Company are subject to an 80% dividends received exclusion.
Required:
A. Prepare a consolidated statements workpaper for the year ended December 31, 2004.
B. Calculate consolidated net income for the year ended December 31, 2004, and consolidated retained earnings on December 31, 2004, using the analytical or t-account approach.