P Company purchased 80% of the outstanding common stock of S Company on May 1, 2014, for a cash payment of $318,000.S Company's December 31, 2013 balance sheet reported common stock of $200,000 and retained earnings of $180,000.During the calendar year 2014, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 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, 2014?

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 $318,000, and the proportionate share of the subsidiary's net assets is $260,000 (80% x $325,000). The difference between these two amounts is $58,000. However, since the subsidiary declared a dividend of $75,000 on November 1, the proportionate share of the subsidiary's net assets is reduced by $6,000 (80% x $75,000). Therefore, the amount needed to establish reciprocity is $52,000 ($58,000 - $6,000).

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