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Do not submit as
your own.

Problem 6-16 Complete Equity with Downstream Sales LO 6 (Note: This is the same problem as Problem 6-11, but assuming the use of the
complete equity method.) Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $540,000
on January 1, 2009, hen Sedbrook Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December
31, 2013, are presented here. Pruitt Sedbrook Corporation Company Cash $ 83,000 $ 80,000 Accounts Receivable 213,000 112,500
Inventory 150,000 110,000 Investment in Sedbrook Co. 568,250 Other Assets 500,000 400,000 Dividends Declared 100,000 30,000
Purchases 850,000 350,000 Other expenses 180,000 137,500 $2, 644,250 $1,220,000 Accounts Payable 70,000 30,000 Other Liabilities
75,000 40,000 Common Stock 800,000 500,000 Retained Earnings 1/1 532,000 120,000 Sales 1,100,000 530,000 Equity in Subsidiary
Income 67,250 $2,644,250 $1,220,000 Ending Inventory $ 200,000 $ 120,000 The January 1, 2013, inventory of Sedbrook Company
includes $30,000 of profit recorded by Pruitt Corporation on 2012 sales. During 2013, Pruitt Corporation made intercompany sales of
$200,000 with a markup of 25% on cost. The ending inventory of Sedbrook Company includes goods purchased in 2013 from Pruitt for
$50,000. Pruitt Corporation uses the complete equity method to record its investment in Sedbrook Company. a. Prepare the consolidated
statements workpaper for the year ended December 31, 2013. b. Calculate consolidated retained earnings on December 31, 2013, using the
analytical or t-account approach. c. If you completed Problem 6-11 compare the consolidated balances obtained in requirement A with those
obtained in that problem.

PRUITT CORPORATION AND SUBSIDIARY

Part A Consolidated Statement Workpaper
For the Year Ended December 31, 2013

Pruitt Sedbrook Eliminations Noncontrolling Consolidated

Corporation Company Dr. Cr. Interest Balances
Income Statement
Sales 1,100,000 530,000 (2) 200,000 1,430,000
Equity in subsidiary income 67,250 (1) 67,250
Total revenue 1,167,250 530,000 1,430,000
Cost of goods sold:
Beginning inventory 150,000 110,000 (4) 30,000 230,000
Purchases 850,000 350,000 (2) 200,000 1,000,000
Cost of goods available 800,000 460,000 1,230,000
Less ending inventory 200,000 120,000 (3) 10,000 310,000

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 Cost of goods sold 1,000,000 340,000 920,000
Other expenses 180,000 137,500 317,500
Total cost & expense 980,000 477,500 1,237,500
Net/consolidated income 187,250 52,500 192,500
Noncontrolling interest in income 5,250 * (5,250)*
Net income to retained earnings 187,250 52,500 277,250 230,000 5,250 187,250

Statement of Retained Earnings

1/1 Retained earnings
Pruitt Corporation 532,000 532,000
Sedbrook Company 120,000 (5)120,000
Net income from above 187,250 52,500 277,250 230,000 5,250 187,250
Dividends declared
Pruitt Corporation (100,000) (100,000)
Sedbrook Company (30,000) (1) 27,000 (3,000)
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12/31 Retained earnings to balance sheet 619,250 142,500 397,250 257,000 2,250 619,250

Pruitt Sedbrook Eliminations Noncontrolling Consolidated

Corporation Company Dr. Cr. Interest Balances
Balance Sheet
Cash 83,000 80,000 163,000
Accounts receivable 213,000 112,500 325,500
Inventory 200,000 120,000 (3) 10,000 310,000
Investment in Sedbrook Company 568,250 (4) 30,000 (5) 558,000
(1) 40,250
Other assets 500,000 400,000 900,000
Total assets 1,564,250 712,500 1,698,500

Accounts payable 70,000 30,000 100,000

Other liabilities 75,000 40,000 115,000
Capital stock:
Pruitt Corporation 800,000 800,000

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 Sedbrook Company 500,000 (5) 500,000
Retained earnings from above 619,250 142,500 397,250 257,000 2,250 619,250
1/1 Noncontrolling interest (5) 62,000 62,000
12/31 Noncontrolling interest 64,250 64,250
Total liabilities & equity 1,564,250 712,500 927,250 927,250 1,698,500

*Noncontrolling interest in income = 0.10 ´ $52,500 = $5,250

Explanations of workpaper entries are on next page

Explanation of workpaper entries

(1) Equity in Subsidiary Income 67,250*
Investment in Sedbrook Company 40,250
Dividends Declared ($30,000 ´ 0.90) 27,000
To reverse the effect of parent company entries during the
year for subsidiary dividends and income
* (.90)($52,500) + $30,000 - $10,000 = $67,250

(2) Sales 200,000

Purchases (Cost of Goods Sold) 200,000
To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CoGS) 10,000

Ending Inventory (Balance Sheet) 10,000
To eliminate unrealized intercompany profit in
ending inventory ($50,000 – ($50,000/1.25))

(4) Investment in Sedbrook Company 30,000

Beginning Inventory (Income Statement) 30,000
To recognize intercompany profit in beginning inventory
realized during the year

(5) Beginning Retained Earnings- Sedbrook Co. 120,000

Common Stock - Sedbrook Company 500,000
Investment in Sedbrook Company ($568,250 - $40,250 + $30,000) 558,000

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 Noncontrolling Interest ($500,00 + $120,000) x .10 62,000
To eliminate investment account and create noncontrolling interest account

Part B Pruitt Corporation's retained earnings on 12/31/2013 $ 619,250

Consolidated retained earnings on 12/31/2013 $ 619,250

Part C The balances are the same as in Problem 6-11

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