workpaper entries and consolidated retained earnings, cost method

Project Description:

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 corp. on the aquisition 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 determinted to have 15-year useful life when purchased at the beginning of 2006. saxton corp 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 book value and the value implied by the purchase price in 2012 consolidated statement 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 the date was $2,000,000.
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