Pot Corporation acquired all the outstanding stock of Ski Corporation on April 1, 2011, for $15,000,000, when Ski’s stockholders’ equity consisted of $5,000,000 capital stock and $2,000,000 retained earnings. The price reflected a $500,000 undervaluation of Ski’s inventory (sold in 2011) and a $3,500,000 undervaluation of Ski’s buildings (remaining useful life seven years from April 1, 2011).
During 2012, Ski sold land that cost $1,000,000 to Pot for $1,500,000. Pot resold the land for $2,200,000 during 2015.
Pot sells inventory items to Ski on a regular basis, as follows (in thousands):
| Sales to Ski | Cost to Pot | Percentage Unsold by Ski at Year End | Percentage Unpaid by Ski at Year End |
2011 | $ 500 | $300 | 0% | 0% |
2012 | 1,000 | 600 | 30 | 50 |
2013 | 1,200 | 720 | 18 | 30 |
2014 | 1,000 | 600 | 25 | 20 |
2015 | 1,500 | 900 | 20 | 20 |
Ski sold equipment with a book value of $800,000 to Pot on January 3, 2015, for $1,600,000. This equipment had a remaining useful life of four years at the time of sale.
Pot uses the equity method to account for its investment in Ski. The financial statements for Pot and Ski are summarized as follows (in thousands):
| Pot | Ski |
Combined Income and Retained Earnings Statement for the Year Ended December 31, 2015 | ||
Sales | $26,000 | $11,000 |
Gain on land | 700 | — |
Gain on equipment | — | 800 |
Income from Ski | 1,380 | — |
Cost of sales | (15,000) | (5,000) |
Depreciation expense | (3,700) | (2,000) |
Other expenses | (4,280) | (2,800) |
Net income | 5,100 | 2,000 |
Add: Beginning retained earnings | 12,375 | 4,000 |
Deduct: Dividends | (3,000) | (1,000) |
Retained earnings December 31 | $14,475 | $ 5,000 |
Balance Sheet at December 31, 2015 | ||
Cash | $ 1,170 | $ 500 |
Accounts receivable—net | 2,000 | 1,500 |
Inventories | 5,000 | 2,000 |
Land | 4,000 | 1,000 |
Buildings—net | 15,000 | 4,000 |
Equipment—net | 10,000 | 4,000 |
Investment in Ski | 14,405 | — |
Total assets | $51,575 | $13,000 |
Accounts payable | $ 4,100 | $ 1,000 |
Other liabilities | 7,000 | 2,000 |
Capital stock | 26,000 | 5,000 |
Retained earnings | 14,475 | 5,000 |
Total equities | $51,575 | $13,000 |
REQUIRED : Prepare a consolidation workpaper for Pot Corporation and Subsidiary for the year ended December 31, 2015.
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