Company P Purchased a 30% Interest in Company S for $120,000

Essay

Company P purchased a 30% interest in Company S for $120,000 on January 1, 20X7, when Company S had the following stockholders' equity:
Any excess cost was due to equipment that is being depreciated over 5 years using straight-line depreciation.
Since the investment, Company P has consistently sold goods to Company S to realize a 30% gross profit. Such sales totaled $50,000 during 20X9. Company S had $10,000 of such goods in its beginning inventory and $40,000 in its ending inventory.
On January 1, 20X9, Company S sold a machine with a book value of $15,000 to Company P for $30,000. The machine has a 5-year life and is being depreciated on a straight-line basis.
Company S reported income of $75,000 before taxes for 20X9. Both firms are subject to a 30% corporate tax rate. Company S paid no dividends in 20X9. An 80% dividend earned exclusion rate applies.
Required:
Prepare all entries caused by Company P's investment in Company S for 20X9 (including tax ramifications). Assume that Company P has recorded the tax on its internally generated income. Company P has properly recorded the investment in previous periods. Assume that sufficient previously recorded tax liability exists to offset any deferred tax expense.