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:
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$$\begin{array} { l r } \text { Common stock ( } \$ 10 \text { par) } & \$ 100,000 \\\text { Paid-in capital in excess of par } & 200,000 \\\text { Retained earnings (deficit) } & ( 20,000 ) \\\text { Total } & \$ 280,000 \\\end{array}$$ Any excess cost was due to equipment that is being depreciated over 5 years using straight-line depreciation.
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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.
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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.
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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.
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Required:
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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.
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