Phips Co.purchases 100 percent of Sips Company on January 1,20X2,when Phips' retained earnings balance is $320,000 and Sips' is $120,000.During 20X2,Sips reports $20,000 of net income and declares $8,000 of dividends.Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips;Phips declares dividends of $35,000.
-Based on the preceding information,what is the consolidated retained earnings balance on December 31,20X2?
A)$402,000
B)$410,000
C)$430,000
D)$562,000

Question

Quizplus · Accepted Answer

To calculate the consolidated retained earnings balance, we need to first eliminate the effect of the intercompany dividend declared by Sips. Phips' equity-method income of $20,000 reflects Sips' net income of $20,000, so we have to deduct the $8,000 dividend declared by Sips from this amount. This gives a net income contribution of $12,000 from Sips to the consolidated earnings.

Next, we need to add Phips' separate earnings of $125,000 to the net income contribution from Sips of $12,000, which gives us a total consolidated net income of $137,000.

To determine the consolidated retained earnings balance, we add this amount to Phips' beginning balance of $320,000, and then subtract the dividends declared by Phips of $35,000. This gives us an ending consolidated retained earnings balance of $422,000 ($320,000 + $137,000 - $35,000).

Thus, the correct answer is option C.

Phips CoPurchases 100 Percent of Sips Company on January 1,20X2,when Phips