Upstream and Downstream Workpaper—Partial Equity Method On January 1, 2003, Perry Company purchased 80% of Selby Company for $960,000. At that time Selby had capital stock outstanding of $400,000 and retained earnings of $400,000.
The fair value of Selby Company’s assets and liabilities is equal to their book value except for the following: LO5 Fair Value Book Value Inventory $230,000 $155,000 Plant and Equipment (10-year life) 800,000 600,000 One-half of the inventory was sold in 2003; the remainder was sold in 2004.
At the end of 2003, Perry Company had in its ending inventory $54,000 of merchandise it had purchased from Selby Company during the year. Selby Company sold the merchandise at 20% above cost. During 2004, Perry Company sold merchandise to Selby Company for $300,000 at a markup of 20% of the selling price. At December 31, 2004, Selby still had merchandise that it purchased from Perry Company for $78,000 in its inventory.
Financial data for 2004 are presented here:
Perry Company Selby Company Sales $1,385,000 $ 720,000 Equity in Subsidiary Income 208,000 Total Revenue 1,593,000 720,000 Cost of Goods sold:
Beginning Inventory 210,000 155,000 Purchases 875,000 360,000 Cost of Goods Available 1,085,000 515,000 Less: Ending Inventory 400,000 225,000 Cost of Goods Sold 685,000 290,000 Other Expenses 225,000 170,000 Total Cost and Expense 910,000 460,000 Net Income $ 683,000 $ 260,000 1/1 Retained Earnings $1,472,700 $ 450,000 Net Income 683,000 260,000 Dividends Declared (40,000) (30,000)
12/31 Retained Earnings $2,115,700 $ 680,000 Cash $ 90,000 $ 65,000 Accounts Receivable (net) 297,000 85,000 Inventory 400,000 225,000 Investment in Selby Company 1,184,000 Plant and Equipment (net) 880,000 540,000 Other Assets (net) 384,000 230,000 Total Assets $3,235,000 $1,145,000 Accounts Payable $ 24,300 $ 25,000 Other Liabilities 95,000 40,000 Common Stock 1,000,000 400,000 Retained Earnings 2,115,700 680,000 Total Liabilities and Equity $3,235,000 $1,145,000 Required:
A. Prepare the consolidated statements workpaper for the year ended December 31, 2004.
B. Calculate consolidated retained earnings on December 31, 2004, using the analytical or t-account approach.