Question

On 1/1/X1, P acquired 80% of S for $800,000 when S's equity included $500,000 capital stock and $500,000 of Retained Earnings. During years X1 and X2 S earned $100,000 and $120,000, respectively. In both years, S paid $20,000 of dividends. Assume that P uses the cost method and that you are consolidating the pre-closing trial balances of P and S on 12/31/X2. What worksheet entries are required to establish reciprocity between P's Investment and S's equity accounts so that they can be liminated

Answer 1

The worksheet entries are;

Debit Investment in S for $80,000 and credit P's Retained Earnings for $80,000

Step-by-step explanation:

In this question, we are asked to calculate and state the worksheet entries that are required to establish reciprocity between P’s investments and S’s equity accounts so they can be liminated

We proceed as follows;

Firstly, we identify the beginning retained earning balance of s as at 1/1/x1; This is $500,000 as obtained from the question.

We then add the net income for two years which is 100,000

Mathematically this will give ; 500,000 + 100,000 = $600,000

This mean that the retained earning is $600,000

Now the unrecognized income is the retained earning - Beginning retained earning balance of s = 600,000-500,000 = $100,000

P’s share is 80% of this which is 80% of 100,000 = $80,000

Thus the worksheet entries is as follows;

Debit Investment in S for $80,000 and credit P's Retained Earnings for $80,000