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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