Solution manual advanced accounting 4e jeter ch06

ANSWERS TO EXERCISES Exercise 6-1 To eliminate intercompany sales of 2011 2 12/31 Inventory-Income Statement Cost of Goods Sold 487,500 To eliminate unrealized intercompany profit in in

CHAPTER 6

Note: The letter A indicated for a question, exercise, or problem means that the question, exercise,

or problem relates to the chapter appendix

ANSWERS TO QUESTIONS

1 No If all of the merchandise sold by one affiliate to another has subsequently been sold to outsiders, the only effect that the elimination of intercompany sales of merchandise will have on the consolidated financial statements is to reduce consolidated sales and consolidated cost of sales by an equal amount Consolidated net income will be unaffected

2 The effect of eliminating profit on intercompany sales after deducting selling and administrative expenses rather than gross profit is to include selling and administrative expenses associated with the intercompany sale in consolidated inventories Support for the gross profit approach is based on the proposition that consolidated inventory balances should include manufacturing costs only and that generally accepted accounting standards normally preclude the capitalization of selling and administrative costs

3 $10,000 in intercompany profit should be eliminated on the consolidated statements workpaper ($60,000 –

2

000

100,

$

= $10,000) After this elimination the merchandise will be included in the

consolidated statements at its cost to the affiliated group of $50,000 (

5 When the subsidiary is the intercompany seller, the unrealized profit is shown in the accounts of the sub (S Company) These accounts provide the starting point for the calculation of the noncontrolling share of current year earnings Failure to eliminate unrealized profit would result in the overstatement

of the noncontrolling share in profits However, when the parent is the intercompany seller, the unrealized profit is shown in the accounts of the parent (P Company) Since the noncontrolling interest does not share in the earnings of P Company, the noncontrolling interest is not affected by the unrealized profit therein

6 Noncontrolling interest in consolidated net assets at the beginning of the year is adjusted by debiting

or crediting the subsidiary’s beginning retained earnings in the consolidated statements workpaper

7 The only procedural difference in the workpaper entries relating to the elimination of intercompany profits when the selling affiliate is a less than wholly owned subsidiary is that the noncontrolling interest in the amount of intercompany profit in beginning inventory must be recognized by debiting

or crediting the noncontrolling shareholders’ percentage interest in such adjustments to the beginning retained earnings of the subsidiary

8 Controlling interest in consolidated net income is equal to the parent company’s income from its independent operations that has been realized in transactions with third parties plus its share of reported subsidiary income that has been realized in transactions with third parties and adjusted for its share of the amortization of the difference between implied and book value for the period

9 It is important to distinguish between upstream and downstream sales because the calculation of noncontrolling interest in the consolidated financial statements differs depending on whether the intercompany sale giving rise to unrealized intercompany profit is upstream or downstream

10 Profit relating to the intercompany sale of merchandise is recognized in the consolidated financial statements in the period in which the merchandise is sold to outsiders It is recognized in the consolidated financial statements by reducing cost of goods sold (thus increasing gross profit and net income)

ANSWERS TO BUSINESS ETHICS CASE

1

Independence of the auditor is essential in maintaining effective audits When auditors are involved in non-audit services, their independence may be impaired (in essence they may

be viewed as auditing their own work)

Many times auditors have to rely on management representation when no supporting evidence is available Auditors’ involvement in non-audit services can help them gain sufficient familiarity with their client’s business and operational activities to reduce such dependencies and perhaps to lower audit risk

2

The growing importance of non-audit service fees to the audit firms over time may have increased the potential for the auditors to lose independence, even to the extent of financial fraud involvement

The increasing effort to reduce costs (in a competitive marketplace for audit services) imposes limitations on the scope of the audit work involved to avoid operating at a loss Subsidizing any shortfall between audit revenues and audit costs with non-audit fees can help in overcoming such limitations

3

Audit fees would have to increase if auditors are held liable to a greater degree The

increased fees would cover both increased auditor effort to detect errors and to cover the increased litigation settlements/insurance premiums The additional benefits would be weighed against the costs

Timeliness and accuracy present constant tradeoffs in any audit Time and budget

constraints may potentially result in an audit staff not performing sufficient work to meet deadlines Further, excessive cost-cutting may cause audit work to be inappropriately reduced, which leads to increased reliance by auditors on client presentations to document areas where the data are not easily available Such reliance can cause audit judgments to

be inappropriately influenced When factors outside their control cause auditors to rely on the representations of others, they should not be solely responsible for resulting errors Legislation aimed at protecting auditors to some extent also serves to keep audits from becoming prohibitively expensive

ANSWERS TO EXERCISES

Exercise 6-1

To eliminate intercompany sales of 2011

(2) 12/31 Inventory-Income Statement (Cost of Goods Sold) 487,500

To eliminate unrealized intercompany profit in inventory

Exercise 6-2

Noncontrolling Interest Percentage 0.20

Noncontrolling Interest in Net Income $ 105,000

Exercise 6-3

2011

Unrealized intercompany profit included therein

2012 (Rounded to nearest dollar)

Intercompany profit included in beginning inventory, now realized 1,300

Unrealized intercompany profit included therein

.

,

$

) (18,000) Pearce Company's income from its independent operations that has been realized

Pearce's share of Searl Company adjusted income that has been realized in transactions

Controlling interest in consolidated net income for 2011 $1,812,000

*[$600,000 – ($75,000 + $112,500)] x 0.80 = 330,000,

where $75,000 = $375,000/5

Alternatively,

Pearce's share of Searl Company adjusted income that has been realized in transactions

Controlling interest in consolidated net income for 2012 $2,337,000

*[$750,000 – $75,000] x 0.80 = $540,000,

where $75,000 = $375,000/5

Exercise 6-4 (continued)

Alternatively,

Plus: Pearce Company's interest in the realized net income of Searl Company:

Less Amortization of difference between implied and book value

Less unrealized profit included therein ($90,000 -

251

00090

.

,

$

Income realized in transaction with third parties $394,500

Pearce Company's interest therein (0.8 $394,500) $315,600

2012

Pearce Company's income from its independent operations $1,800,000

Plus: Pearce Company's interest in the realized net income of Searl Company:

Less amortization of difference between implied and book value (75,000)

Less profit included therein that has not been realized in transactions

with third parties ($105,000 -

251

000105

00090

.

,

$

Income realized in transaction with third parties $672,000

Pearce Company's interest therein (0.8 $672,000) 537,600

Plus: profit realized from beginning inventory 3,800

Less: unrealized profit in ending inventory (4,800)

Sierra Company's net income realized in transactions with third parties $171,000

Santa Fe Company's net income from its independent operations $120,000

Plus: profit realized from beginning inventory 4,600

Less: unrealized profit in ending inventory (2,300)

Santa Fe Company's net income realized in transactions with third parties $122,300

To eliminate intercompany sales

(2) Ending Inventory – Income Statement (CoGS) 25,000

To eliminate intercompany profit in ending inventory ($150,000 -

201

000150

To eliminate intercompany sales

(2) Beginning Retained Earnings-Perkins 25,000

Beginning Inventory – Income Statement (CoGS) 25,000

To recognize intercompany profit included in beginning inventory and reduce beginning

consolidated retained earnings for unrealized intercompany profit at the beginning of the year

(3) Ending Inventory – Income Statement (CoGS) 27,000

To eliminate intercompany profit in ending inventory ($162,000 -

201

000162

.

,

$

)

Exercise 6-8

2011

To eliminate intercompany profit in ending inventory ($150,000 - $150,000/1.2)

2012

To eliminate intercompany sales

(2) 1/1 Retained Earnings-Perkins Company (85%)($25,000) 21,250

To recognize intercompany profit in beginning inventory realized during the year and reduce

controlling and noncontrolling interests for their share of unrealized intercompany profit at beginning

of year

To eliminate intercompany profit in ending inventory ($162,000 - $162,000/1.2)

Exercise 6-9 PEAT COMPANY AND SUBSIDIARY

Consolidated Income Statement For the Year Ended December 31, 2012

Less Noncontrolling Interest in Consolidated Income (b) 210,000

Plus unrealized profit in ending inventory (

(b) Reported net income of subsidiary

10

000200

.

,

$

$2,000,000 Plus unrealized profit on subsidiary sales in 2011 that is considered realized in 2012

ANSWERS TO PROBLEMS

Problem 6-1

Part A

To eliminate intercompany sales

(2) 12/31 Inventory (Income Statement) 18,167

To eliminate unrealized intercompany profit in ending inventory ($109,000 –

21

000109

To eliminate intercompany sales

(2) Beginning Retained Earnings-Peel Co (0.9 $18,167) 16,350

Noncontrolling Interest (0.10 $18,167) 1,817

To recognize gross profit in beginning inventory realized in 2012

(3) 12/31 Inventory (Income Statement) 22,167

To eliminate unrealized intercompany profit in ending inventory

($133,000 – ($133,000/1.2))

Add: Realized profit in beginning inventory 18,167

Less: Unrealized profit in ending inventory (22,167)

Subsidiary income included in consolidated income 126,000

Noncontrolling interest in consolidated income $12,600

Part C Peel Company's net income from independent operations $300,000

Reported income of Seacore Company $130,000

Less: Unrealized profit on intercompany sales of 2012 (22,167)

Add: Profit on 2011 sales to Peel realized in transactions

Subsidiary income realized in transactions with third parties $126,000

Peel 's share of subsidiary income (0.90 $126,000) 113,400

Controlling interest in consolidated net income $413,400

Problem 6-2

Part A 2011

To eliminate intercompany sales

(2) 12/31 Inventory (Income Statement) 44,250

To eliminate unrealized intercompany profit in ending inventory ($221,250 0.2)

2012

To eliminate intercompany sales

(2) 12/31 Inventory (Income Statement) 15,450

To eliminate intercompany profit in ending inventory ($77,250 0.20)

(3) Beginning Retained Earnings-Plaster Co (0.85 $44,250) 37,612

Noncontrolling Interest (0.15 $44,250) 6,638

To recognize realization of intercompany profit in beginning inventory

Add: Intercompany profit in beginning inventory 44,250

Deduct Unrealized intercompany profit in ending inventory (15,450)

Subsidiary income realized in transactions with third parties

and included in consolidated income 364,200

Noncontrolling interest in consolidated income $54,630

Add: Intercompany profit in beginning inventory 44,250

Deduct: Unrealized profit in ending inventory (15,450)

Subsidiary Income realized in transactions with third parties $364,200

Plaster's share of subsidiary income ($364,200 0.85) 309,570 Controlling interest in consolidated net income $1,089,570

Problem 6-3

Part A 2011

To eliminate intercompany sales

(2) 12/31 Inventory (Income Statement) 25,000

To eliminate unrealized profit in ending inventory ($125,000 –

251

000125

To eliminate intercompany sales

(2) 12/31 Inventory (Income Statement) 34,000

To eliminate intercompany profit in ending inventory

($170,000 – ($170,000/1.25))

(3) Beginning Retained Earnings-Peer Co 25,000

To recognize intercompany profit in beginning inventory

realized during the year

2011 2012

Part B

Noncontrolling interest ownership percentage 20% 20% Noncontrolling interest in consolidated income $45,000 $55,000

2012

Part C Peer Company's income from independent operations $480,000

Add: Realized profit in beginning inventory 25,000 Peer Company's income realized in transactions with third parties 471,000 Peer Company's share of subsidiary income ($275,000 0.8) 220,000 Controlling interest in consolidated net income $691,000

Problem 6-4

Part A

To eliminate intercompany sales for 2012

(2) Ending Inventory – Income Statement (CoGS) 21,000

To eliminate unrealized profit in ending inventory

(3) Beginning Retained Earnings-Pace Company

($7,000 + ($8,000 0.85) + $8,000) 21,800Noncontrolling Interest ($8,000 0.15) 1,200

Beginning Inventory – Income Statement (CoGS) 23,000

To recognize gross profit in beginning inventory realized in current year

Noncontrolling interest in consolidated income (b) 21,450Controlling interest in consolidated net income (c) $455,550 (a) ($475,000* + $23,000 – $21,000)

(b) (0.15 ($150,000 + $8,000 – $15,000)

(c) ($200,000 + ($7,000 – $2,000) + (0.85 ($150,000 + $8,000 – $15,000)) + ($125,000 + $8,000 –

$4,000))

* ($200,000 + $150,000 + $125,000)

Problem 6-5 PRUITT CORPORATION AND SUBSIDIARY

For the Year Ended December 31, 2013

Pruitt Sedbrook Eliminations Noncontrolling Consolidated Corporation Company Debit Credit Interest Balances

Problem 6-5 (continued)

Pruitt Sedbrook Eliminations Noncontrolling Consolidated

Problem 6-5 (continued)

Explanations of workpaper entries

(1) Investment in Sedbrook Company (0.90 ($144,000 – $95,000)) 44,100

Beginning Retained Earnings - Pruitt Co 44,100

To establish reciprocity/convert to equity as of 1/1/13

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 10,000

To eliminate unrealized intercompany profit in ending

inventory ($60,000 – ($60,000/1.2)

(4) Beginning Retained Earnings - Pruitt Co 25,000

To recognize intercompany profit in beginning inventory

realized during the year

To eliminate intercompany dividends

(6) Beginning Retained Earnings - Sedbrook Co 144,000

Investment in Sedbrook Co.($625,500 + $44,100) 669,600

To eliminate investment account and create noncontrolling interest account

Problem 6-5 (continued)

Part B Pruitt Corporation's Retained Earnings on 12/31/13 $651,900

Amount of Pruitt Corporation Retained Earnings that have not been

realized in transactions with third parties 10,000 Pruitt Corporation's Retained Earnings that have been realized in

Increase in retained earnings of Sedbrook Company that have been

realized in transactions with third parties

from 1/1/09 to 12/31/13 ($172,000 – $95,000) $ 77,000

Consolidated Retained Earnings as of 12/31/13 $711,200

Consolidated Retained Earnings

Pruitt Corporation's Retained Earnings on 12/31/13 $651,900

Pruitt Corporation's share of the increase in

Sedbrook Company's Retained Earnings

since acquisition ($172,000 - $95,000).90 69,300

Unrealized profit on downstream

sales to Sedbrook Company (in

Sedbrook's ending Inventory 10,000

Consolidated Retained Earnings $711,200

Problem 6-6 PRUITT CORPORATION AND SUBSIDIARY

Consolidated Statements Workpaper For the Year Ended December 31, 2013

Consolidated Consolidated Pruitt Sedbrook Eliminations Income Retained Noncontrolling Consolidated Corporation Company Dr Cr Statement Earnings Interest Balances

Noncontrolling Interest in Consolidated Net Income (6,300) 6,300

Controlling Interest in Consolidated Net Income $203,700 203,700

Consolidated Retained Earnings $711,200 711,200 1/1 Noncontrolling Interest in Net Assets (6) 74,400 74,400

12/31 Noncontrolling Interest in Net Assets _ $77,200 77,200

$1,104,600 $1,104,600

*Noncontrolling Interest in Consolidated Income = 0.10 $63,000 = $6,300

See solution to Problem 6-5 for explanation of Workpaper entries

Problem 6-7 PAQUE CORPORATION AND SUBSIDIARY

For the Year Ended December 31, 2013

Paque Segal Eliminations Noncontrolling Consolidated

Less Ending Inventory 210,000 172,500 (3) 15,000 367,500

Segal Company (60,000) (5) 54,000 (6,000)

12/31 Retained Earnings to Balance Sheet 765,000 191,250 589,500 426,000 4,125 788,625

*Noncontrolling Interest in Consolidated Income = 0.10 ($71,250 + $45,000 – $15,000) = $10,125

Problem 6-7(continued) Paque Segal Eliminations Noncontrolling Consolidated

Accounts Receivable 319,500 168,750 488,250 Inventory 210,000 172,500 (3) 15,000 367,500 Investment in Segal Company 810,000 (1) 27,000 (6) 837,000

Accounts Payable 105,000 45,000 150,000 Other Current Liabilities 112,500 60,000 172,500

Segal Company 750,000 (6) 750,000 Retained Earnings from above 765,000 191,250 589,500 426,000 4,125 788,625 1/1 Noncontrolling Interest (4) 4,500 (6) 93,000 88,500

12/31 Noncontrolling Interest 92,625 92,625 Total liabilities & equity 2,182,500 1,046,250 1,371,000 1,371,000 2,403,750

Explanations of workpaper entries are on next page

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 15,000

To eliminate unrealized intercompany profit in ending inventory ($75,000 0.20)

(4) Beginning Retained Earnings - Paque Co ($45,000 0.90) 40,500

Noncontrolling Interest ($45,000 0.10) 4,500

To recognize intercompany profit realized during the year and to reduce

controlling and noncontrolling interests for their share of unrealized profit

at beginning of year

To eliminate intercompany dividends

(6) Beginning Retained Earnings- Segal Co 180,000

Investment in Segal Company ($810,000 + $27,000) 837,000 Noncontrolling Interest ($750,000 + $180,000) x 10 93,000

To eliminate investment account and create noncontrolling interest account

Problem 6-7 (continued)

Part B

PAQUE CORPORATION AND SUBSIDIARY Calculation of Controlling Interest in Net Income For Year Ended December 31,2013 Paque's net income from its independent operations

($103,500 reported income less $54,000 in subsidiary dividend income) $49,500

Plus: profit on prior year's sales to Segal realized in transactions

Paque's income from its independent operations that has been realized

Less amortization of difference between implied and book value 0

Less: unrealized profit on 2013 sales to Paque (15,000)

Plus: profit on prior year's sales to Paque realized in transactions

Income of Segal that has been realized in transactions with third parties $ 101,250

Controlling interest in Consolidated net income $140,625

Noncontrolling Interest in Consolidated Income

Unrealized profit on upstream Net income reported by Segal Company $ 71,250

sales in ending inventory

15,000

Realized profit (upstream sales) from beginning inventory 45,000 Amortization of the difference between

implied and book value 0

Subsidiary Income included in Consolidated Income $101,250

Controlling Interest in Consolidated Income

Net income internally generated by Paque Corporation $ 49,500

Paque Corporation's percentage of Segal Company's income

realized from third parties, 90($101,250) 91,125

Controlling Interest in Consolidated Income $140,625

Problem 6-8

Purchases (Cost of Goods Sold) ($950,000 1.2) 1,140,000

To eliminate intercompany sales for 2011

To eliminate unrealized profit in ending Inventory ($576,000 – ($576,000/1.2))

Beginning Retained Earnings - Sterling Company 425,000

Difference between Implied and Book Value ($1,400,000/.90 – $1,225,000) 330,556

Noncontrolling Interest [($1,400,000/.90) x 10] 155,556

Plant and Equipment (net) ($200,000 – $20,000) 180,000

Alternative to entry (4)

(4a)

Problem 6-8 (continued)

Part B

Patten Company and Subsidiary Sterling Company Analytical Calculation of Controlling Interest in Consolidated Net Income

For the Year Ended December 31, 2011

Patten Company's net income from its independent operations

($2,000,000 reported income less $0 in subsidiary dividend income) $ 2,000,000 Less: Unrealized profit on 2011 sales to Sterling Company - 0 - Plus: Profit on prior year's sales to Sterling Company

realized in transactions with third parties in 2011 - 0 -

Patten Company's income from its independent operations that has been

Less: Amortization of the difference between implied and book value

Less: Unrealized profit on 2011 sales to Patten Company (96,000)

Plus: Profit on prior year's sales to Patten Company realized

in transactions with third parties in 2011 - 0 - Income of Sterling Company that has been realized in

Controlling interest in consolidated net income $ 2,227,100

Part C Noncontrolling Interest In Consolidated Income

Less: Amortization of the difference between implied and book value

Less: Unrealized profit on 2011 sales to Patten Company (96,000) Income of Sterling Company included in consolidated income $252,333 Noncontrolling interest share thereof (.1 $252,333) $25,233

Problem 6-9 PERRY COMPANY AND SUBSIDIARY

Consolidated Statements Workpaper

Perry Selby Eliminations Noncontrolling Consolidated Company Company Debit Credit Interest Balances

12/31/ Retained Earnings to Balance Sheet $1,940,000 $735,000 $908,000 $426,000 $45,400 $2,147,600

* Noncontrolling interest in income = 2 ($280,000 + $12,000 – $25,000 – $15,000) = $50,400

Problem 6-9 (continued) Perry Selby Eliminations Noncontrolling Consolidated

Company Company Debit Credit Interest Balances

Balance Sheet

Difference between Implied & Book Value (6) 512,500 (7) 512,500

Total Liabilities and Equity $3,077,000 $1,175,000 $2,327,400 $2,327,400 $3,678,100 Explanations of workpaper entries are on next page

Problem 6-9 (continued)

Explanations of workpaper entries

Computation and Allocation of Difference Schedule

Parent Non- Entire Share Controlling Value

Share Purchase price and implied value $990,000 247,500 1,237,500 *

Less: Book value of equity acquired 580,000 145,000 725,000

Difference between implied and book value 410,000 102,500 512,500

(1) Investment in Selby Company (0.80 ($480,000 – $375,000)) 84,000

To establish reciprocity/convert to equity as of 1/1/10

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 16,400

To eliminate unrealized intercompany profit in ending inventory ($82,000 .2)

(4) Beginning Retained Earnings - Perry Co ($12,000 .80) 9,600

Noncontrolling Interest ($12,000 .20) 2,400

To recognize intercompany profit in beginning inventory realized during the year

($60,000 – ($60,000/1.25)) = $12,000

To eliminate intercompany dividends

(6) Beginning Retained Earnings - Selby Co 480,000

Difference between Implied and Book Value 512,500

Investment in Selby Co ($990,000 + $84,000) 1,074,000 Noncontrolling Interest [$247,500 +.2 x ($480,000 – $375,000)] 268,500

Problem 6-9 (continued)

Beginning Retained Earnings - Perry Co 20,000

(8) Other Expenses (Depreciation) ($150,000/10) 15,000

Part B

Amount of Perry Company Retained Earnings that have not been

Perry Company's Retained Earnings that have been realized in

Increase in retained earnings of Selby Company from date of

acquisition to 12/31/10 ($735,000 – $375,000) 360,000

Less: Cumulative effect of adjustments to date relating to amortization of the

difference between implied and book value

Less:Unrealized profit on sales to Perry in 2010 that has not been

Increase in retained earnings of Selby Company since acquisition

that has been realized in transactions with third parties 280,000

Perry 's Share of unrealized profit on Perry 's Retained Earnings on 12/31/10 $1,940,000

downstream sales to Selby

(in Selby's ending inventory), Increase in Selby’s Retained Earnings

2($82,000) 16,400 since acquisition ($735,000 - $375,000) = $360,000

Less: cumulative amortization of difference between implied and book value 80,000 Adjusted Increase $280,000 Perry’s share thereof 80 224,000

Consolidated Retained Earnings $2,147,600

Problem 6-10

Unrealized profit therein (6,000) (5,000)

Income included in consolidated income 44,000 55,000

Noncontrolling interest in consolidated income $4,400 $11,000 $15,400

Salvador Company's net income $50,000

Less unrealized profit included therein (6,000)

Salvador Company's realized income $44,000

Less unrealized profit included therein (5,000)

Sencal Company's realized income $55,000

Controlling interest in consolidated net income $671,600

Penn Company's net income from its own operations $400,000 Less unrealized profit included therein ($5,000 + $9,000) (14,000)

Less unrealized profit included therein (10,000)

Salvador Company's realized income $41,000

Less unrealized profit included therein (2,000)

Sencal Company's realized income $78,000

Controlling interest in consolidated net income $497,300

Problem 6-11 PRUITT CORPORATION AND SUBSIDIARY

For the Year Ended December 31, 2013

Corporation Company Dr Cr Interest Balances

Net income to retained earnings 167,250 52,500 257,250 230,000 5,250 187,250

Statement of Retained Earnings

12/31 Retained earnings to balance sheet 629,250 142,500 407,250 257,000 2,250 619,250

*Noncontrolling interest in income = 0.10 $52,500 = $5,250

Problem 6-11 (continued)

Explanation of workpaper entries

(1) Equity in Subsidiary Income 47,250

Investment in Sedbrook Company 20,250 Dividends Declared ($30,000 90) 27,000

To reverse the effect of parent company entries during the

year for subsidiary dividends and income

To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 10,000

Ending Inventory (Balance Sheet) 10,000

To eliminate unrealized intercompany profit in

ending inventory ($50,000 – ($50,000/1.25))

(4) Beginning Retained Earnings- Pruitt Corporation 30,000

Beginning Inventory(Income Statement) 30,000

To recognize intercompany profit in beginning inventory

realized during the year

(5) Beginning Retained Earnings- Sedbrook Co 120,000

Common Stock - Sedbrook Company 500,000

Investment in Sedbrook Company ($578,250 - $20,250) 558,000 Noncontrolling Interest ($500,000 + $120,000) x 10 62,000

To eliminate investment account and create noncontrolling account

Part B Pruitt Corporation's retained earnings on 12/31/2013 $ 629,250

Unrealized profit on downstream sales included therein (10,000) Unrealized profit on upstream sales included therein 0 Consolidated retained earnings on 12/31/2013 $ 619,250

Consolidated Retained Earnings

Pruitt’s Retained Earnings on 12/31/13 $629,250

Unrealized profit on downstream

sales to Sedbrook (in Sedbrook's ending

Consolidated Retained Earnings $619,250