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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