Problem

Pan Corporation acquired an 85 percent interest in Sly Corporation on August 1, 2011, for...

Pan Corporation acquired an 85 percent interest in Sly Corporation on August 1, 2011, for $522,750, equal to 85 percent of the underlying equity of Sly on that date.

In August 2011, Sly sold inventory items to Pan for $60,000 at a gross profit of $15,000. Onethird of these items remained in Pan’s inventory at December 31, 2011.

On September 30, 2011, Pan sold an inventory item (equipment) to Sly for $50,000 at a gross profit to Pan of $10,000. When this equipment was placed in service by Sly, it had a five-year remaining useful life and no expected salvage value.

Sly’s dividends were declared in equal amounts on June 15 and December 15, and its income was earned in relatively equal amounts throughout each quarter of the year. Pan applies the equity method, such that its net income is equal to the controlling share of consolidated net income. Financial statements for Pan and Sly are as follows (in thousands):

 

Pan

Sly

Combined Income and Retained Earnings Statement for the Year Ended December 31, 2011

Sales

$ 910

$400

Income from Sly

7.5

Cost of sales

(500)

(250)

Operating expenses

(200)

(90)

Net income

217.5

60

Add: Beginning retained earnings

192.5

100

Deduct: Dividends

(100)

(40)

Retained earnings December 31

$ 310

$120

Balance Sheet at December 31, 2011

Cash

$ 33.75

$ 10

Dividends receivable

17

Accounts receivable—net

120

70

Inventories

300

150

Plant assets—net

880

500

Investment in Sly—85%

513.25

Total assets

$1,864

$730

Accounts payable

$ 154

$ 90

Dividends payable

20

Capital stock

1,400

500

Retained earnings

310

120

Total equities

$1,864

$730

REQUIRED: Prepare a consolidation workpaper for the year ended December 31, 2011.

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