Pal Corporation acquired a 90 percent interest in Sor Corporation on January 1, 2011, for $540,000, at which time Sor’s capital stock and retained earnings were $300,000 and $180,000, respectively. The fair value/book value differential is goodwill. Financial statements for Pal and Sor for 2012 are as follows (in thousands):
| Pal | Sor |
Combined Income and Retained Earnings Statement for the Year Ended December 31, 2012 | ||
Sales | $ 900 | $380 |
Income from Sor | 80 | — |
Gain on land | 10 | — |
Cost of sales | (400) | (200) |
Operating expenses | (226) | (80) |
Net income | 364 | 100 |
Add: Retained earnings January 1 | 404 | 240 |
Less: Dividends | (300) | (40) |
Retained earnings, December 31 | $ 468 | $300 |
Balance Sheet at December 31, 2012 | ||
Cash | $ 266 | $ 28 |
Accounts receivable | 360 | 200 |
Dividends receivable | 36 | — |
Inventories | 120 | 72 |
Land | 200 | 60 |
Buildings—net | 560 | 160 |
Machinery—net | 660 | 280 |
Investment in Sor | 606 | — |
| $2,808 | $800 |
Accounts payable | $ 400 | $100 |
Dividends payable | 60 | 40 |
Other liabilities | 280 | 60 |
Capital stock | 1,600 | 300 |
Retained earnings | 468 | 300 |
| $2,808 | $800 |
ADDITIONAL INFORMATION
1. Pal sold inventory items to Sor for $120,000 during 2011 and $144,000 during 2012. Sor’s inventories at December 31, 2011 and 2012, included unrealized profits of $20,000 and $24,000, respectively.
2. On July 1, 2011, Pal sold machinery with a book value of $56,000 to Sor for $70,000. The machinery had a useful life of 3.5 years at the time of sale, and straight-line depreciation is used.
3. During 2012, Pal sold land with a book value of $30,000 to Sor for $40,000.
4. Pal’s accounts receivable on December 31, 2012, includes $20,000 due from Sor.
5. Pal uses the equity method for its 90 percent interest in Sor.
REQUIRED : Prepare a consolidation workpaper for Pal Corporation and Subsidiary for the year ended December 31, 2012.
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