P Company purchased 80% of the outstanding common stock of S Company on May 1, 2017, for a cash payment of $318,000. During the calendar year 2017, 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, 2017?

Question

Quizplus · Accepted Answer

The amount needed to establish reciprocity under the cost method is the difference between the parent's investment in the subsidiary and the parent's share of the subsidiary's net income. In this case, the parent's investment in the subsidiary is $318,000, and the parent's share of the subsidiary's net income is $210,000 x 80% = $168,000. Therefore, the amount needed to establish reciprocity is $318,000 - $168,000 = $52,000.

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