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Parch Corporation acquired a 90% interest in Sarg Corporation’s outstanding voting
common stock on January 1, 20X1 for $630,000 cash. The stockholder’s equity of Sarg
on this date consisted of $500,000 capital stock and $200,000 retained earnings.
The separate financial statement of Parch and Sarg corporations at and for the
year ended December 31, 20X1 are summarized as follows:
Parch
Sarg
$ 700,000
$ 500,000
Combined Income and Retained Earnings Statements
for the Year Ended December 31, 20X1
Sales
Income from Sarg
70,000
Gain on land
-
Gain on equipment
10,000
20,000
Cost of sales
Depreciation expense
Other expenses
Net income
Beginning retained earnings
Dividends
Retained earnings December 31, 20X1
-
-
(300,000)
(300,000)
(90,000)
(35,000)
(200,000)
(65,000)
200,000
110,000
600,000
200,000
(100,000)
(50,000)
$ 700,000
$ 260,000
$
$
Balance Sheet at December 31, 20X1
Cash
Accounts receivable-net
35,000
30,000
90,000
110,000
100,000
80,000
Other current items
70,000
40,000
Land
50,000
70,000
Buildings-net
200,000
150,000
Equipment-net
500,000
400,000
Investment in Sarg
655,000
Inventories
$1,700,000
$ 880,000
Accounts payable
$
85,000
Other liabilities
-
$
50,000
70,000
Capital stock, $10 par
500,000
500,000
Retained earnings
200,000
260,000
790,000
$ 880,000
$
During 20X1 Parch made sales of $50,000 to Sarg at a gross profit of $15,000.
One-third of these sales were inventoried by Sarg at year-end. Sarg owed Parch $10,000
on open account at December 31, 20X1.
Sarg sold land that cost $20,000 to Parch for $30,000 on July 1,20X1. Parch still
owns the land. On January 1, 20X1 Parch sold equipment with a book value of $20,000
and a remaining useful life of four years to Sarg for $40,000. Sarg uses straight-line
depreciation and assumes no salvage value on this equipment.
Required : Prepare consolidation working papers for Parch Corporation and Subsidiary
for the year ended December 31, 20X1.