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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