Intercompany Downstream Sales, Cost Method Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $625,500 on January 1, 2001, when Sedbrook Company’s retained earnings were $95,000. Preclosing trial balances for the two companies at December 31, 2005, are presented here: LO5 Pruitt Sedbrook Corporation Company Cash $ 90,800 $ 96,000 Accounts Receivable (net) 243,300 135,000 Inventory 1/1 165,000 132,000 Investment in Sedbrook Co. 625,500 Other Assets 550,000 480,000 Dividends Declared 110,000 35,000 Purchases 935,000 420,000 Other Expenses 198,000 165,000 Total $2,917,600 $1,463,000 Accounts Payable $ 77,000 $ 36,000 Other Liabilities 120,700 47,000 Common Stock 880,000 600,000 Retained Earnings (1/1) 598,400 144,000 Sales 1,210,000 636,000 Dividend Income 31,500 —
Total $2,917,600 $1,463,000 Ending Inventory _$ 220,000 _1$4 4,000 The January 1, 2005, inventory of Sedbrook Company includes $25,000 of profit recorded by Pruitt Corporation on 2004 sales. During 2005, Pruitt Corporation made intercompany sales of $250,000 with a markup of 20% on cost. The ending inventory of Sedbrook Company includes goods purchased in 2005 from Pruitt for $60,000.
Required:
A. Prepare the consolidated statements workpaper for the year ended December 31, 2005.
B. Calculate consolidated retained earnings on December 31, 2005, using the analytical or t-account approach.