PROBLEM 7-7 Workpaper, Cost Method, Comprehensive Problem

Parsons Company acquired 90% of the outstanding common stock of Shea Company on June 30, 2014, for $426,000. On that date, Shea Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was equal to their book value. The excess of implied over the fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Shea Company, which had an expected remaining useful life of five years from June 30, 2014.

Financial data for 2016 are presented here:

Parsons Company Shea Company

Sales $2,555,500 $1,120,000

Dividend Income 54,000

Total Revenue 2,609,500 1,120,000

Cost of Goods Sold 1,730,000 690,500

Expenses 654,500 251,000

Total Cost and Expense 2,384,500 941,500

Net Income $ 225,000 $ 178,500

1/1 Retained Earnings $ 595,000 $ 139,500

Net Income 225,000 178,500

Dividends Declared (100,000) (60,000)

12/31 Retained Earnings $ 720,000 $ 258,000

Parsons Company Shea Company

Cash $ 119,500 $ 132,500

Accounts Receivable 342,000 125,000

Inventory 362,000 201,000

Other Current Assets 40,500 13,000

Land 150,000

Investment in Shea Company 426,000

Property and Equipment 825,000 241,000

Accumulated Depreciation (207,000) (53,500)

Total Assets $2,058,000 $ 659,000

Accounts Payable $ 295,000 $ 32,000

Other Liabilities 43,000 19,000

Capital Stock 1,000,000 300,000

Additional Paid-in Capital 50,000

Retained Earnings 720,000 258,000

Total Liabilities and Equity $2,058,000 $ 659,000

On December 31, 2014, Parsons Company sold equipment (with an original cost of $100,000 and accumulated depreciation of $50,000) to Shea Company for $97,500. This equipment has since been depreciated at an annual rate of 20% of the purchase price. During 2015 Shea Company sold land to Parsons Company at a profit of $15,000.

The inventory of Parsons Company on December 31, 2015 included goods purchased from Shea Company on which Shea Company recognized a profit of $7,500. During 2016, Shea Company sold goods to Parsons Company for $375,000, of which $60,000 was unpaid on December 31, 2016. The December 31, 2016, inventory of Parsons Company included goods acquired from Shea Company on which Shea Company recognized a profit of $10,500.

Required:

A. Prepare a consolidated financial statements workpaper for the year ended December 31, 2016.

B. Prepare a schedule to calculate consolidated retained earnings on December 31, 2016, using an analytical or t-account approach. (Hint: Due to rounding, you may be out of balance by $1. To avoid this, you should carry decimals until the final calculation.)

Please Kindly Show All the work Okay. Thank you