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Poco Corporation acquired a 70% interest in Sam Corporation on January 1, 20X1 for
$450,000 cash. The stockholders’ equity of Sam when Poco acquired its 70% interest consisted of $300,000 capital stock and $200,000 retained earnings. On July 1, 20X2,
Poco acquired an additional 10% interest in Sam for $77,500 to bring its interest in Sam to 80%. The financial statements of Poco and Sam corporations at and for the year ended
December 31, 20X2 are as follows:
Combined Income and Retained Earnings Statements for the Year Ended December 31, 20X2
Sales
Income from Sam
Gain on machinery
Poco
$900,000
32,500
40,000
Sam
$500,000
-
-
Cost of sales
Depreciation expense
Other expenses
Net income
Add : Beginning retained earnings
Less : Dividends
Retained earnings December 31, 20X2
(400,000)
(90,000)
(160,000)
322,500
150,000
(200,000)
$275,500
(300,000)
(60,000)
(40,000)
100,000
250,000
(50,000)
$300,000
Balance Sheet at December 31, 20X2
Cash
Accounts receivable
Dividends receivable
Inventories
Other current items
Land
Buildings-net
Machinery-net
Investment in Sam
$ 20,000
90,000
20,000
90,000
20,000
50,000
60,000
100,000
539,500
$ 80,000
30,000
-
70,000
80,000
40,000
105,000
320,000
-

Total assets
Accounts payable
Dividends payable
Capital stock, $10 par
Retained earnings
Total equities
$989,500
$177,000
100,000
140,000
$989,500
300,000
275,500
$725,000
$ 40,000
25,000
60,000
300,000
300,000
$725,000
Additional Information
1.
The cost/book value differential from Poco’s two purchases of interests in Sam was allocated to goodwill with a 20-year write-off period.
2.
Poco Corporation sold inventory items to Sam during 20X1 for $60,000, at a gross profit of $10,000. During 20X2, Poco’s sales to Sam were $48,000, at a gross profit of $8,000. Half of the 20X1 intercompany sales were inventoried by
Sam at year-end 20X2. Sam owes Poco $25,000 from 20X2 purchases.
3.
At year-end 20X1, Sam purchased land from Poco for $20,000. The cost of this land to Poco was $12,000.
4.
Poco sold machinery with a book value of $40,000 to Sam for $80,000 on July 8,
20X2. The machinery had a five-year useful life at this time. Sam uses straightline depreciation without considering salvage value on the machinery.
5.
Poco uses a one-line consolidation in accounting for Sam. Both Poco and Sam corporations declared their dividends for the year 20X2 in equal amounts in June and December.
Required : Prepare working papers to consolidate the financial statements of Poco
Corporation and Subsidiary for the year ended December 31, 20X2.