Pep Company

On January 1, 20x1, Pep Company acquired 80% of the common stock of Sky Company for $195,000. On this date Sky had total owners' equity of $200,000 (common stock, other paid-in capital, and retained earnings of $10,000, $90,000 and $100,000 respectively).

Any excess of cost over book value is attributable to inventory (worth $6,250 more than cost), to equipment (worth $12,500 more than book value), and to patents. FIFO is used for inventories. The equipment has remaining life of five years and straight-line depreciation is used. The excess attributable to the patents is to be amortized over 20 years.

During 20x1 and 20x2, Pep has appropriately accounted for its investment in Sky by using the simple equity method.

On January 1, 20x2, Pep held merchandise acquired from Sky for $10,000. During 20x2, Sky sold merchandise to Pep for $50,000, $20,000 of which is still held by Pep on December 31, 20x2. Sky's usual gross profit on affiliated sales is 50%.

On December 31, 20x1, Pep sold equipment to Sky at a gain of $10,000. During 20x2, the equipment was used by Sky. Depreciation is being computed using the straight-line method, a five-year life, and no salvage value.

Required:

a. Using the information above and the worksheet below, prepare a determination and distribution of excess schedule, and related amortization of excesses.

b. Prepare journal entries for all related transactions.

c. Prepare and complete a worksheet for consolidated financial statements for the year ended December 31, 20x2.

d. Prepare, in good format, consolidated financial statements for the year including the income statement and balance sheet ended December 31, 20x2.