PROBLEM $4-5$

Consolidated Workpaper, Partially Owned Subsidiary$$Subsequent Years

On January $1,2022,$ Perez Company purchased $90\%$ of the capital stock of Sanchez Company for $$85,000.$ Sanchez Company had capital stock of $$70,000$ and retained earnings of $$12,000$ at that time. On December $31,2026,$ the trial balances of the two companies were:

Perez

Sanchez

Cash $$13,000$ $$14,000$

Accounts receivable $22,00036,000$

Inventory, $1/114,0008,000$

Advance to Sanchez Company $8,0000$

Investment in Sanchez Company $85,0000$

Plant and equipment $50,00044,000$

Land $17,8006,000$

Dividends declared $10,00012,000$

Purchases $84,00020,000$

Other expense $10,00016,000$

$$Total debits $$313,800$ $$156,000$

Accounts payable $$6,000$ $$6,000$

Other liabilities $37,0000$

Advance from Perez Company $08,000$

Capital stock $100,00070,000$

Retained earnings $50,00030,000$

Sales $110,00042,000$

Dividend income $10,8000$

$$Total credits $$313,800$ $$156,000$

Inventory, $12/31$ $$40,000$ $$15,000$

Any difference between book value and the value implied by the purchase price relates to goodwill.

Required:

What method is being used by Perez to account for its investment in Sanchez Company? How can you tell?

Prepare a workpaper for the preparation of consolidated financial statements on $12/31/2026.$