P Company purchased 80% of the outstanding common stock of S Company on May 1, 2014, for a cash payment of $1,272,000.S Company's December 31, 2013 balance sheet reported common stock of $800,000 and retained earnings of $540,000.During the calendar year 2014, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1.What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2015?

Question

Quizplus · Accepted Answer

The amount needed to establish reciprocity under the cost method is the difference between the carrying amount of the investment and the proportionate share of the subsidiary's net assets. The carrying amount of the investment is $1,272,000. The proportionate share of the subsidiary's net assets is 80% of $1,340,000 (the sum of the common stock and retained earnings as of December 31, 2013, plus the net income for 2014), which is $1,072,000. The difference between the carrying amount of the investment and the proportionate share of the subsidiary's net assets is $208,000.

P Company Purchased 80% of the Outstanding Common Stock of S