On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000.

On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $316,000. On this date, Subsidiary had common stock, other paid-in capital, and retained earnings of $40,000, $120,000, and $190,000, respectively. Net income and dividends for 2 years for Subsidiary Company were as follows:

20X120X2

Net income$50,000$90,000

Dividends10,00020,000

On January 1, 20X1, the only tangible assets of Subsidiary that were undervalued were inventory and building. Inventory, for which FIFO is used, was worth $5,000 more than cost. The inventory was sold in 20X1. Building, which was worth $15,000 more than book value, has a remaining life of 8 years, and straight-line depreciation is used. Any remaining excess is goodwill.

Use worksheet 3-1 (next page) to consolidate the parent and subsidiary for December 31, 20x2 using the sophisticated equity method.