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):

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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Pal Sto Combined Income and Retained Earnings Statement for the Year Ended December 31, 2012 Sales Income from Sto Gain on land Cost of sales Operating expenses $ 4,500 346 50 (2,000) 1,130) 1.766 2,000 $1,900 (1,000) (400) 500 1.200 Net income Add: Retained earnings January 1 Less: Dividends Retained earnings, December 31 2.266 Balance Sheet at December 31, 2012 Cash Accounts receivable Dividends receivable $1,364 1,800 180 600 1,000 2,800 3,300 2,922 13,966 $ 140 1,000 Land Buildings-net Machinery-net Investment in Sto 360 300 800 1400 Accounts payable Dividends payable Other liabilities Capital stock Retained earnings 2,000 300 1,400 8,000 2,266 13,966 S 500 200 300 1,500 1,500 $4,000