Problem

Pal Corporation acquired a 90 percent interest in Sto Corporation on January 1, 2011, for...

Pal Corporation acquired a 90 percent interest in Sto Corporation on January 1, 2011, for $2,700,000, at which time Sto’s capital stock and retained earnings were $1,500,000 and $900,000, respectively. The fair value cost/book value differential is due to a patent with a 10-year amortization period. Financial statements for Pal and Sto for 2012 are as follows (in thousands):

 

Pal

Sto

Combined Income and Retained Earnings Statement for the Year Ended December 31, 2012

Sales

$ 4,500

$1,900

Income from Sto

346

Gain on land

50

Cost of sales

(2,000)

(1,000)

Operating expenses

(1,130)

(400)

Net income

1,766

500

Add: Retained earnings January

1 2,000

1,200

Less: Dividends

(1,500)

(200)

Retained earnings, December 31

$ 2,266

$1,500

Balance Sheet at December 31, 2012

Cash

$ 1,364

$ 140

Accounts receivable

1,800

1,000

Dividends receivable

180

Inventories

600

360

Land

1,000

300

Buildings—net

2,800

800

Machinery—net

3,300

1,400

Investment in Sto

2,922

 

$13,966

$4,000

Accounts payable

$ 2,000

$ 500

Dividends payable

300

200

Other liabilities

1,400

300

Capital stock

8,000

1,500

Retained earnings

2,266

1,500

 

$13,966

$ 4,000

ADDITIONAL INFORMATION

1. Pal sold inventory to Sto for $600,000 during 2011 and $720,000 during 2012; Sto’s inventories at December 31, 2011 and 2012, included unrealized profits of $100,000 and $120,000, respectively.


2. On July 1, 2011, Pal sold machinery with a book value of $280,000 to Sto for $350,000. The machinery had a useful life of 3.5 years at the time of intercompany sale, and straight-line depreciation is used.


3. During 2012, Pal sold land with a book value of $150,000 to Sto for $200,000.


4. Pal’s accounts receivable on December 31, 2012, includes $100,000 due from Sto.


5. Pal uses the equity method for its 90 percent interest in Sto.

REQUIRED: Prepare a consolidation workpaper for Pal and Subsidiary for the year ended December 31, 2012.

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