Exam 7: Special Issues in Accounting for an Investment in a Subsidiary

Saddle Corporation is an 80%-owned subsidiary of Paso Company.On January 1, 2016, Saddle sold Paso a machine for $50,000.Saddle's cost was $60,000 and the book value was $40,000.The machine had a 5-year remaining life at the time of the sale.A consolidated balance sheet only is being prepared on December 31, 2019.The retained earnings of the controlling interest requires which of the following adjustments?

On January 1, 2016, Pepper Company purchased 90% of the common stock of Salt Company for $360,000 when Salt had total shareholders' equity as follows: ? ? 8\% Preferred Stock, \ 100 par \ 100,000 Common Stock, \ 10 par 50,000 Other Paid-in Capital 120,000 Retained Earnings 180,000 Total \ 450,000 Any excess of cost over book value on this date is attributed to a patent, to be amortized over 10 years.The 8% preferred stock is cumulative, non-participating, and has a liquidating value of par plus dividends in arrears.There were no preferred dividends in arrears on January 1, 2016.Pepper elected to account for its investment in Salt using the simple equity method. ? During 2016, Salt had a net loss of $10,000 and paid no dividends.In 2017, Salt had net income of $100,000 and paid dividends totaling $36,000. ? During 2017, Salt sold merchandise to Pepper for $40,000, of which $20,000 is still held by Pepper on December 31, 2017.Salt's usual gross profit is 40%. ? Required: ? Complete the Figure 7-7 worksheet for consolidated financial statements for the year ended December 31, 2017. ? ?