Workpaper Entries and Consolidated Net Income for Two Years, Cost Method On January 1, 2004, Palmero Company
Question:
Workpaper Entries and Consolidated Net Income for Two Years, Cost Method On January 1, 2004, Palmero Company purchased an 80% interest in Santos Company for $9,800,000, at which time Santos Company had retained earnings of $1,000,000 and capital stock of $500,000. On the date of acquisition, the fair value of the assets and liabilities of Santos Company was equal to their book value, except for property and equipment (net), which had a fair value of $1,500,000 and a book value of $600,000. The property and equipment had an estimated remaining life of 10 years. Palmero Company reported net income from independent operations of $400,000 in 2004 and $425,000 in 2005. Santos Company reported net income of $300,000 in 2004 and $400,000 in 2005. Neither company declared dividends in 2004 or 2005. Palmero uses the cost method to account for its investment in Santos. LO2 Required:
A. Prepare in general journal form the entries necessary in the consolidated statements workpapers for the years ended December 31, 2004 and 2005.
B. Prepare a schedule or t-account showing the calculation of the controlling interest in combined net income for the years ended December 31, 2004, and December 31, 2005.
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