A 90% interest in Saxton Corporation was purchased by Palm Incorporated on January 2, 2011. The capital stock balance of Saxton Corporation was $3,000,000 on this date, and the balance in retained earnings was $1,000,000. The cost of the investment to Palm Incorporated was $3,750,000.
The balance sheet information available for Saxton Corporation on the acquisition date revealed these values:
Book Value Fair Value
Inventory (FIFO) $ 700,000 $ 800,000
Equipment (net) 2,000,000 2,000,000
Land 1,600,000 2,000,000
The equipment was determined to have a 15-year useful life when purchased at the beginning of 2006. Saxton Corporation reported net income in 2011 of $250,000 and $300,000 in 2012. No dividends were declared in either of those years.
Required:
A. Prepare the workpaper entries, assuming that the cost method is used to account for the investment, to establish reciprocity, to eliminate the investment account, and to allocate and depreciate the difference between cost and book value in the 2012 consolidated statements workpaper.
B. Calculate the consolidated retained earnings for the year ended December 31, 2012, assuming that the balance in Palm Incorporated's ending retained earnings on that date was $2,000,000.