P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017, for a cash payment of $1,272,000. S Company's December 31, 2016 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2017, 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, 2018?

Question

Quizplus · Accepted Answer

The reciprocity amount is the difference between the book value of the subsidiary's net assets and the cost of the investment. The book value of the subsidiary's net assets is $800,000 + $540,000 + $840,000 - $300,000 = $1,880,000. The cost of the investment is $1,272,000. The difference is $1,880,000 - $1,272,000 = $208,000.

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