Pal Corporation purchased a 90 percent interest in Sal Corporation on December 31, 2010, for $2,700,000 cash, when Sal had capital stock of $2,000,000 and retained earnings of $500,000. All Sal's assets and liabilities were recorded at fair values when Pal acquired its interest. The excess of fair value over book value is due to previously unrecorded patents and is being amortized over a 10 year period.

The Pal-Sal affiliation is a vertically integrated merchandising operation, with Sal selling all of its output to Pal Corporation at 140 percent of its cost. Pal sells the merchandise acquired from Sal at 150 percent of its purchase price from Sal. All of Pal's December 31, 2011, and December 31, 2012, inventories of $280,000 and $420,000, respectively, were acquired from Sal. Sal's December 31, 2011, and December 31, 2012, inventories were $800,000 each.

Pal's accounts payable at December 31, 2012, includes $100,000 owed to Sal from 2012 purchases.

Comparative financial statements for Pal Corporation and Sal Corporation at and for the year ended December 31, 2012, are as follows (in thousands):

REQUIRED
Prepare consolidation workpapers for Pal Corporation and Subsidiary for the year ended December 31, 2012.

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Combined Income and Retained Earnings Statement for the Year Ended December 31, 2012 $8,190 819 (5,460) (1,544) 2,005 1,200 (1,000) $5,600 (4,000) 1,000 Add: Beginning retained earnings Deduct: Dividends (500) $1,200 Retained earnings December 31, 2012 Balance Sheet at December 31, 2012 $753 0 $ 500 Other current assets 3,000 3,000 3,132 $7,905 $1,700 4,000 Investment in Sal $4,500 $1,300 2,000 1,200 500 Current liabilities Retained earnings Total equities