Problem

Par Corporation acquired a 90 percent interest in Sag Corporation’s outstanding voting com...

Par Corporation acquired a 90 percent interest in Sag Corporation’s outstanding voting common stock on January 1, 2011, for $630,000 cash. The stockholders’ equity of Sag on this date consisted of $500,000 capital stock and $200,000 retained earnings.

The financial statements of Par and Sag at and for the year ended December 31, 2011, are summarized as follows (in thousands):

 

Par

Sag

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

Sales

$ 700

$ 500

Income from Sag

70

Gain on land

10

Gain on equipment

20

Cost of sales

(300)

(300)

Depreciation expense

(90)

(35)

Other expenses

(200)

(65)

Net income

200

110

Beginning retained earnings

600

200

Dividends

(100)

(50)

Retained earnings December 31

$ 700

$ 260

Balance Sheet at December 31, 2011

Cash

$ 35

$ 30

Accounts receivable—net

90

110

Inventories

100

 80

Other current items

70

40

Land

50

70

Buildings—net

200

150

Equipment—net

500

400

Investment in Sag

655

 

$1,700

$ 880

Accounts payable

$ 160

$ 50

Other liabilities

340

70

Capital stock, $10 par

500

500

Retained earnings

700

260

 

$1,700

$ 880

During 2011, Par made sales of $50,000 to Sag at a gross profit of $15,000. One-third of these sales were inventoried by Sag at year-end. Sag owed Par $10,000 on open account at December 31, 2011. Sag sold land that cost $20,000 to Par for $30,000 on July 1, 2011. Par still owns the land. On January 1, 2011, Par sold equipment with a book value of $20,000 and a remaining useful life of four years to Sag for $40,000. Sag uses straight-line depreciation and assumes no salvage value on this equipment.

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

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