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Problem 7-17 Workpaper- complete Equity Method, Comprehensive problem Padilla Company acquired 90% of the outstanding
common stock of Sanchez Company on june 30, 011, for $46,000. On that date, Sanchez Company had retained earnings in the
amount of $60,000, and the fair value of the recorded assets and liabilities was equal to their book value. The excess of implied over
fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Sanchez Company which had an
expected remaining useful life of five years from june 30, 2011. Financial data for 2013 are presented here: Padilla Company Sanchez
Company Sales $2,555,500 $1,120,000 Equity in Subsidiary Income 156,050 Total Revenue 2,711,550 1,120,000 Cost of goods sold
1,730,000 690,500 Expenses 654,500 251,000 Total cost and expense 2,384,500 941,500 Net Income $327,050 $178,500 1/1 Retained
Earnings 591,200 139,500 Net Income 327,050 178,500 Dividends declared (100,000) (60,000) 12/31Retained Earnings $818,250
$258,000 Cash $119,500 $132,500 Accounts Receivable 342,000 125,000 Inventory 362,000 201,000 Other Current Assets 40,500
13,000 Land 150,000 Investment in Sanchez company 524,250 Property and equipment 825,000 241,000 Accumulated Depreciation
(207,000) (53,500) Total assets $2,156,250 $659,000 Accounts payable $295,000 32,000 Other liabilities 43,000 19,000 Capital stock
1,000,000 300,000 Additional paid-in capital 50,000 Retained Earning 818,250 258,000 Total Liabilities and Equity $2,156,250
$659,000 On December 31,2011, Padilla company old equipment (with an original cost of $100,000 and accumulated depreciation of
$50,000) to sanchez company for $97,500. This equipment has since been depreciated at an annual rate of 20% of the purchase price.
During 2012, sanchez company sold land to padilla company at a profit of $15,000. The inventory of padilla company on December
31,2012 included good purchase from sanchez company recognized a profit of $7,500. During 2013, sanchez company sold goods to
padilla company for $375,000 of which $60,000 was unpaid on December 31, 2013. The December 31,2013, inventory of padilla
company include goods acquired from sanchez company on which sanchez company recognized a profit of $10,500. a. Prepare a
consolidated financial statements workpaper for the year ended December 31,2013. b. Prepare a schedule to calculate consolidated
retained earnings on December 31, 2013, using a t-account or analytical approach.
Part A
PADILLA COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2013

Padilla Sanchez Eliminations Noncontrolling Consolidated

Company Company   Debit Credit Interest Balances
Income Statement
Sales 2,555,500 1,120,000 (6) 375,000 3,300,500
Equity in Subsidiary income 156,050 (1) 156,050
Total Revenue 2,711,550 1,120,000 3,300,500
Cost of Goods Sold 1,730,000 690,500 (8) 10,500 (5) 7,500 2,048,500
(6) 375,000
Expenses 654,500 251,000 (11) 12,667 (3) 9,500 908,667
Total Cost & Expenses 2,384,500 941,500 2,957,167
Net/Consolidated Income 327,050 178,500 343,333
Noncontrolling Interest in Income * 16,283 (16,283)
Net Income to
Retained Earnings 327,050 178,500 554,217 392,000 16,283 327,050

Statement of Retained Earnings

1/1 Retained Earnings
Padilla Company 591,200 591,200
Sanchez Company 139,500 (9) 139,500

Net Income from above 327,050 178,500 554,217 392,000 16,283 327,050
Dividends Declared
Padilla Company (100,000) (100,000)
Sanchez Company (60,000) (1) 54,000 (6,000)
12/31 Retained earnings
to Balance Sheet 818,250 258,000 693,717 446,000 10,283 818,250

Padilla Sanchez Eliminations Noncontrolling Consolidated

Company Company Debit Credit Interest Balances
Balance Sheet
Cash 119,500 132,500 252,000
Accounts Receivable 342,000 125,000 (7) 60,000 407,000
Inventory 362,000 201,000 (8) 10,500 552,500
Other Current Assets 40,500 13,000 53,500
Investment in Sanchez Company 524,250 (2) 47,500 (1) 102,050 0
(4) 13,500 (3) 9,500
(5) 6,750 (9) 497,550
(11) 17,100
Difference between Implied and Book Value (9) 63,333 (10) 63,333 0
Land 150,000 (4) 15,000 135,000
Plant and Equipment 825,000 241,000 (2) 2,500 1,068,500
Accumulated Depreciation (207,000) (53,500) (3) 19,000 (2) 50,000 (291,500)
Manufacturing Formula (10) 63,333 (11) 31,668 31,665
Total Assets 2,156,250 659,000 2,208,665

Accounts Payable 295,000 32,000 (7) 60,000 267,000

Other Liabilities 43,000 19,000 62,000
Capital stock
Padilla Company 1,000,000 1,000,000
Sanchez Company 300,000 (9) 300,000
Additional paid-in capital
Sanchez Company 50,000 (9) 50,000
Retained Earnings from above 818,250 258,000 693,717 446,000 10,283 818,250
Noncontrolling Interest in Net Assets (4) 1,500 (9) 55,283 51,132
(5) 750
(11) 1,901 61,415 61,415
Total Liabilities & Equity 2,156,250 659,000 1,340,884   1,340,884 2,208,665

* Noncontrolling interest in income = .10  ($178,500 + $7,500 - $10,500 - $12,667) = $16,283

Intercompany Sale of Equipment

Accumulated Remaining
Cost Depreciation Carrying Value Life Depreciation
Original Cost $100,000 $50,000 $50,000 5 yr $10,000
Intercompany Selling Price 97,500 _______ 97,500 5 yr 19,500
Difference $ 2,500 $50,000 $47,500 $ 9,500

Explanations of workpaper entries

(1) Equity in Subsidiary Income 156,050

Investment in Sanchez Company 102,050
Dividends Declared (.90)($60,000) 54,000
To reverse the effect of parent company entries
during the year for subsidiary dividends and income

(2) Plant and Equipment ($100,000 - $97,500) 2,500

Investment in Sanchez Company ($50,000 - $2,500) 47,500
Accumulated Depreciation 50,000
To eliminate unrealized profit on intercompany sale of equipment and to
restore plant and equipment to its book value on the date of intercompany sale

(3) Accumulated Depreciation 19,000

 Expenses (Depreciation expense) 9,500
Investment in Sanchez Company 9,500
To reverse excess depreciation recorded during 2013 (.20$47,500)

(4) Investment in Sanchez Company (.90$15,000) 13,500

Noncontrolling Interest (.10$15,000) 1,500
Land 15,000
To eliminate unrealized profit on intercompany sale of land (upstream sale)

(5) Investment in Sanchez Company (.90$7,500) 6,750

Noncontrolling Interest (.10$7,500) 750
Cost of Goods Sold 7,500
To eliminate intercompany profit in beginning inventory (upstream sale)

(6) Sales 375,000

Cost of Goods Sold (Purchases) 375,000
To eliminate intercompany sale

(7) Accounts Payable 60,000

Accounts Receivable 60,000
To eliminate intercompany payables and receivables
(8) Cost of Goods Sold (Ending Inventory – Income Statement) 10,500
Inventory 10,500
To eliminate unrealized profit in ending inventories

(9) Beginning Retained Earnings - Sanchez Co. 139,500

Capital Stock - Sanchez Co. 300,000
Additional Paid-in Capital - Sanchez Co. 50,000
Difference between Implied and Book Value 63,333
Investment in Sanchez ($426,000 + (($139,500 - $60,000) .9) 497,550
 Noncontrolling Interest [$47,333 + ($139,500 – $60,000) x .10] 55,283
To eliminate the investment account and create noncontrolling interest account

(10) Manufacturing Formula 63,333

Difference between Implied and Book Value 63,333
To allocate the difference between implied and book value

(11) Investment in Sanchez Company ($11,4001.5) 17,100

Noncontrolling Interest ($1,267 x 1.5) 1,901
Expenses ($63,333/5) 12,667
Manufacturing Formula 31,668
To amortize the difference between implied and book value

Alternative to entries (10) and (11)

(10a) Investment in Sanchez Company ($11,4001.5) 17,100
Noncontrolling Interest 1,901
Manufacturing Formula 31,665
Expenses ($63,333/5) 12,667
Difference between Implied and Book Value 63,333
To allocate and amortize the difference between implied and book value
($63,333/5) = $12,667; $63,333 - ($12,6672.5) = $31,665

Part B. Padilla Company's retained earnings on 12/31/2013 $ 818,250

Consolidated retained earnings on 12/31/2013 $ 818,250