Petra Corporation owns 70% of the common stock of Swain Company. The stock was purchased for $420,000 on January 1, 2007, when Swain Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2011, are presented here:

The January 1, 2011, inventory of Petra Corporation includes $10,000 of profit recorded by Swain Company on 2010 sales. During 2011, Swain Company made intercompany sales of $100,000 with a markup of 25% on cost. The ending inventory of Petra Corporation includes goods purchased in 2011 from Swain Company for $40,000.
The affiliates file separate tax returns, and the marginal income tax rate for both companies is 40%. Dividends received from Swain Company are subject to an 80% dividends received exclusion.

Required:
A. Prepare a consolidated statements workpaper for the year ended December 31, 2011.
B. Calculate the controlling interest in consolidated net income for the year ended December 31, 2011, and consolidated retained earnings on December 31, 2011, using the analytical or t-accountapproach.

Transcribed Image Text:

Petra Coporation Swain Company Cash Accounts Receivable (net) Inventory 1/1 100,000 107,750 110,000 Investment in Swain Company Other Assets Dividends Declared Purchases Other Expenses Income Tax Expense $ 35,000 211,000 150,000 456,925 500,000 100,000 850,000 180,000 27,000 2,509,925 400,000 10,000 350,000 114,000 28,250 $1,220,000 Accounts Payable Other Liabilities Deferred Tax Liabilitv Common Stock Retained Earnings Sales Equity in Subsidiary Income 70,000 55,000 20,000 680,000 555,000 1,100,000 29,925 $2,509,925 30,000 35,000 5,000 500,000 120,000 530,000 $1,220,000 Inventory-12/31 140,000 115,000