QUESTION 1

1. Problem 1 (30 points)

   On January 1, 2014, Paterson Company purchased 60% of the common stock of Smith Company for $540,000. At that time, Smiths stockholders equity consisted of $70,000 of Common stock, $190,000 of other contributed capital, and $240,000 of Retained earnings. Any difference between implied and book value relates to Smiths land. Paterson uses the cost method to record its investment in Smith. Its fiscal year ends on December 31.

   Additional information for both companies for 2020 follows:

   Paterson Smith

   Common stock $300,000 $70,000

   Other contributed capital 520,000 190,000

   Retained Earnings, 1/1/2022 940,000 370,000

   Net Income for 2022 262,000 89,000

   Dividends declared in 2022 40,000 21,000

   Required:

   (a). Prepare all the necessary eliminating entries on a consolidated statements workpaper on 12/31/2022.

   (b). Calculate the consolidated net income for 2022.

   Problem 2 (40 points)

   On January 1, 2022, Pilsner Company acquired a 70% interest in Smalley Company for $3,500,000. On that date, Smalley Company had common stock of $900,000 and retained earnings of $1,700,000. The book values of assets and liabilities were equal to fair values except for the following:

   Book Value Fair Value

   Inventory $ 55,000 $ 68,000

   Supplies 8,000 5,500

   Salaries Payable 7,500 9,700

   Equipment (net) 130,000 290,000

   Land 600,000 760,000

   The inventory was sold in 2022. The equipment had an estimated remaining useful life of 8 years. Pilsner Company uses the cost method to record its investment in Smalley Company.

   Required:

   Prepare the workpaper entries to allocate, amortize, and depreciate the difference between implied and book value on:

   (a) 1/1/2022

   (b) 12/31/2022

   Problem 3 (30 points)

   (A) Pinta Company owns 90% of the common stock of Simplex Company. Simplex Company sells merchandise to Pinta Company at 25% above cost. During 2021 and 2022 such sales amounted to $700,000 and $1,100,000, respectively. At the end of each year, Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year.

   Required:

   Prepare, in general journal form, all entries necessary on the 12/31/2022 consolidated statements workpaper to eliminate the effects of intercompany sales.

   (B) Patsy Company sells merchandise to Simon Company at a markup of 30% of selling price. During 2021 and 2022 such sales amounted to $300,000 and $480,000, respectively. At the end of each year, Simon Company had in its inventory one-tenth of the amount of goods purchased from Patsy Company during that year.

   Required:

   Prepare, in general journal form, all entries necessary on the 12/31/2022 consolidated statements workpaper to eliminate the effects of intercompany sales.