Padilla Company acquired 90% of the outstanding common stock of Sanchez Company on June 30, 2019, for $426,000. On that date, Sanchez Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was equal to their book value. The excess of implied over fair value of the recorded net assets was attributed to an unrecorded manufacturing formula held by Sanchez Company, which had an expected remaining useful life of five years from June 30, 2019.

Financial data for 2021 are presented here:

On December 31, 2019, Padilla Company sold equipment (with an original cost of $100,000 and accumulated depreciation of $50,000) to Sanchez Company for $97,500. This equipment had been depreciated at an annual rate of 20% of the purchase price. During 2020, Sanchez Company sold land to Padilla Company at a profit of $15,000.

The inventory of Padilla Company on December 31, 2020, included goods purchased from Sanchez Company on which Sanchez Company recognized a profit of $7,500. During 2021, Sanchez Company sold goods to Padilla Company for $375,000, of which $60,000 was unpaid on December 31, 2021. The December 31, 2021, inventory of Padilla Company included goods acquired from Sanchez Company on which Sanchez Company recognized a profit of $10,500.

Required:

A. Prepare a consolidated financial statements workpaper for the year ended December 31, 2021.

B. Prepare a schedule to calculate consolidated retained earnings on December 31, 2021, using an analytical or t-account approach.

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Padilla Company Sanchez Company $1,120,000 Sales $2,555,500 Equity in Subsidiary Income 160,650 Total Revenue 2,716,150 1,120,000 Cost of Goods Sold 1,730,000 690,500 251,000 Expenses Total Cost and Expense 654,500 2,384,500 941,500 $ 331,650 $ 178,500 Net Income 1/1 Retained Earnings 666,550 139,500 331,650 Net Income 178,500 Dividends Declared |(100,000) $ 898,200 $ 119,500 (60,000) $ 258,000 $ 132,500 12/31 Retained Earnings Cash Accounts Receivable 125,000 342,000 Inventory 362,000 201,000 Other Current AsSsets 40,500 13,000 Land 150,000 Investment in Sanchez Company 604,200 Property and Equipment Accumulated Depreciation 825,000 241,000 (207,000) (53,500) Total Assets $2,236,200 $ 659,000 Accounts Payable $ 295,000 $ 32,000 Other Liabilities 43,000 19,000 Capital Stock Additional Paid-in Capital Retained Earnings 1,000,000 300,000 50,000 898,200 258,000 Total Liabilities and Equity $2,236,200 $ 659,000