Question

The income statements for Paste Company and its subsidiaries, Waste Company, and Baste Company were prepared for the year ended December 31, Year 6, and are shown below:
Additional Information
• Paste purchased its 80% interest in Waste on January 1, Year 1. On this date, Waste had a retained earnings balance of $40,000, and the acquisition differential amounting to $15,000 was allocated entirely to plant, with an estimated remaining life of eight years. The plant is used exclusively for manufacturing goods for resale.
• Paste purchased its 75% interest in Baste on December 31, Year 3. On this date, Baste had a retained earnings balance of $80,000. The acquisition differential amounting to $19,000 was allocated to goodwill; however, because Baste had failed to report adequate profits, the goodwill was entirely written off for consolidated purposes by the end of Year 5.
• Paste has established a policy that any intercompany sales will be made at a gross profit rate of 30%.
• On January 1, Year 6, the inventory of Paste contained goods purchased from
Waste for $15,000.
• During Year 6, the following intercompany sales took place:
Paste to Waste.......... $ 90,000
Waste to Baste.......... 170,000
Baste to Paste.......... 150,000
• On December 31, Year 6, the inventories of each of the three companies contained items purchased on an intercompany basis in the following amounts:
Inventory of
Paste from Baste.......... $ 60,000
Waste from Paste.......... 22,000
Baste from Waste.......... 60,000
• In addition to its merchandising activities, Waste is in the office equipment rental business. Both Paste and Baste rent office equipment from Waste. General and administrative expenses for Paste and Baste include rent expense of $25,000 and $14,000, respectively.
• During Year 6, Waste paid $10,000 interest to Paste for intercompany advances.
• All of Paste’s dividend revenue pertains to its investments in Waste and Baste.
• Retained earnings at December 31, Year 6, for Paste, Waste, and Baste were $703,750, $146,000, and $79,000, respectively.
• Paste Company uses the cost method to account for its investments, and uses tax allocation at a rate of 40% when it prepares consolidated financial statements.
Required:
(a) Prepare a consolidated income statement for Year 6.
(b) Calculate consolidated retained earnings at December 31, Year 6.
(c) Now assume that Paste is a private company, uses ASPE, and chooses to use the equity method. Calculate its income from investments for Year 6.
(d) Use the criteria for revenue recognition to explain the adjustments for unrealized profits on intercompany sales when preparing consolidated financial statements.


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  • CreatedJune 08, 2015
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