On January 1, 2010, Patrick Company purchased 100 percent of the outstanding voting stock of Shawn, Inc., for $1,000,000 in cash and other consideration. At the purchase date, Shawn had common stock of $500,000 and retained earnings of $185,000. Patrick attributed the excess of acquisition-date fair value over Shawn's book value to a trade name with a 25-year life. Patrick uses the equity method to account for its investment in Shawn. During the next two years, Shawn reported the following:
year 2010 Income:$78.000, Dividends:$25,000, Inventory transfer to patrick at transfer price:$190,000.
Year 2011 Income:$85.000, Dividends:$27,000, Inventory transfer to patrick at transfer price:$210,000.
Shawn sells inventory to Patrick after a markup based on a gross profit rate. At the end of 2010 and 2011, 30 percent of the current year purchases remain in Patrick's inventory.
Required:
Create an Excel spreadsheet that computes the following:
1. Equity method balance in Patrick's Investment in Shawn, Inc., account as of December 31, 2011.
2. Worksheet adjustments for the December 31, 2011, consolidation of Patrick and Shawn.
Formulate your solution so that Shawn's gross profit rate on sales to Patrick is treated as a variable.