Problem

Pam Corporation acquired a 70 percent interest in Sam Corporation on January 1, 2011, for...

Pam Corporation acquired a 70 percent interest in Sam Corporation on January 1, 2011, for $420,000 cash, when Sam’s equity of Sam consisted of $300,000 capital stock and $200,000 retained earnings. On July 1, 2012, Pam acquired an additional 10 percent interest in Sam for $67,500, to bring its interest in Sam to 80 percent. The financial statements of Pam and Sam Corporations at and for the year ended December 31, 2012, are as follows (in thousands):

 

Pam

Sam

Combined Income and Retained Earnings Statement for the Year Ended December 31

Sales

$ 900

$500

Income from Sam

38

Gain on machinery

40

Cost of sales

(400)

(300)

Depreciation expense

(90)

(60)

Other expenses

(160)

(40)

Net income

328

100

Add: Beginning retained earnings

155

250

Less: Dividends

(200)

(50)

Retained earnings December 31

$ 283

$300

Balance Sheet at December 31

Cash

$ 20

$ 80

Accounts receivable

130

30

Dividends receivable

20

Inventories

90

70

Other current items

20

80

Land

50

40

Buildings—net

60

105

Machinery—net

100

320

Investment in Sam

510

Total assets

$1,000

$725

Accounts payable

$ 177

$ 40

Dividends payable

100

25

Other liabilities

140

60

Capital stock, $10 par

300

300

Retained earnings

283

300

Total equities

$1,000

$725

ADDITIONAL INFORMATION

1. The fair value/book value differential from Pam’s two purchases of Sam was goodwill.


2. Pam Corporation sold inventory items to Sam during 2011 for $60,000, at a gross profit of $10,000. During 2012, Pam’s sales to Sam were $48,000, at a gross profit of $8,000. Half of the 2011 intercompany sales were inventoried by Sam at year-end 2011, and three-fourths of the 2012 sales remained unsold by Sam at year-end 2012. Sam owes Pam $25,000 from 2012 purchases.


3. At year-end 2011, Sam purchased land from Pam for $20,000. The cost of this land to Pam was $12,000.


4. Pam sold machinery with a book value of $40,000 to Sam for $80,000 on July 8, 2012. The machinery had a five-year useful life at that time. Sam uses straight-line depreciation without considering salvage value on the machinery.


5. Pam uses a one-line consolidation in accounting for Sam. Both Pam and Sam Corporations declared dividends for 2012 in equal amounts in June and December.

REQUIRED: Prepare a workpaper to consolidate the financial statements of Pam Corporation and Subsidiary for the year ended December 31, 2012.

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