Workpaper Eliminating Entries, Losses by Subsidiary Poco Company purchased 85% of the outstanding common stock of Serena Company on December 31, 2002, for $310,000 cash. On that date, Serena Company’s stockholders’ equity consisted of the following: LO6 Common Stock $240,000 Other Contributed Capital 55,000 Retained Earnings 50,000 $345,000 During 2005, Serena Company distributed a dividend in the amount of $12,000 and at yearend reported a net loss of $10,000. During the time that Poco Company has held its investment in Serena Company, Serena Company’s retained earnings balance has decreased $29,500 to a net balance of $20,500 after closing on December 31, 2005. Serena Company did not declare or distribute any dividends in 2003 or 2004. The difference between cost and book value relates to goodwill.
Required:
A. Assume that Poco Company uses the equity method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, 2005. Explain why the partial and complete equity methods would result in the same entries in this instance.
B. Assume that Poco Company uses the cost method. Prepare in general journal form the entries needed in the preparation of a consolidated statements workpaper on December 31, 2005.