Shown below are selected ledger accounts from the trial balance of a parent and its subsidiary as of December 31, Year 10.

Additional Information:

• P Company purchased its 90% interest in S Company in Year 2, on the date that S Company was incorporated, and has followed the eq_uity method to account for its investment since that date.

• On April 1, Year 6, land that had originally cost $21,000 was sold by S Company to P Company for $28,000. P purchased the land with the intention of developing it, but in Year 10 it decided that the location was not suitable and the land was sold to a chain of drug stores.

• On January 1, Year 3, P Company issued $200,000 face value bonds due in 10 years. The proceeds from the bond issue amounted to $195,000.

• On July 1, Year 10, S Company purchased $40,000 of these bonds on the open market at a cost of $38,000. Intercompany bondholding gains (losses) are allocated between the two affiliates. 

• S Company had $76,000 in sales toP Company during Year 10. 

• Use income tax allocation at a 40% tax rate. 

Required:

(a) Prepare a consolidated income statement for Year 10.

(b) Prepare a consolidated statement of retained earnings for Year 10.

Transcribed Image Text:

P Co. S Co. $38,000 Investment in bonds of P Investment in shares of S (equity method) 158,899 416,000 Sales 687,000 2,000 Interest income Equity method income 125,763 Gain on sale of land 7,000 100,000 Common shares 300,000 Retained earnings, beginning of year 78,000 48,000 P Co. S Co. Bonds payable 8% 199,000 Cost of sales 412,200 249,600 Interest expense 16,500 Selling and administrative expense 48,000 24,000 Income tax expense 15,000 9,690 Dividends 10,000 8,000