Pequity Company purchased 85% of the common stock of Sequity Company on April 1, Year 1 for total consideration of $545,000 cash plus $50,000 of contingent consideration as measured according to GAAP at fair value. Both companies have a December 31 year-end. December 31, Year 1, trial balances for Pequity and Sequity were:

Sequity Company declared a $50,000 cash dividend on December 20, Year 1, payable on January 10, Year 2, to stockholders of record on December 31, Year 1. Pequity Company recognized the dividend on its declaration date. Pequity includes dividend income receivable in the accounts receivable account.
On the acquisition date, the book values and fair values of Sequity's assets and liabilities were equal with the following exceptions.

Any difference between book value and fair value for property and equipment is depreciated over seven years. Depreciation expense is reported on the income statement in selling, general, and administration expense. The entire amount of inventory acquired was sold in Year 1.
No payments were made for the earn-out at the end of year 1, and the adjustment to contingent consideration included only interest adjustments (no change in fair value was expected since the actual and target levels for revenue were equal at the end of year 1).
Both companies report depreciation expense as a component of Selling, General, and Administration expense on the income statement. For the year ending December 31, Year 1, Pequity and Sequity reported depreciation expense of $96,000 and $72,000, respectively. Both companies use straight-line and use the full-year option in computing depreciation expense (i.e., they take a full year's depreciation on any asset acquired during the year). The following balance sheet is available for both companies at the beginning of the year of acquisition and the acquisition date.

Required:
1. Prepare a consolidated workpaper at the end of year 1.
2. Prepare a consolidated statement of cash flows for year 1 (see Chapter 4 for a review of the consolidated statement of cash flows).
3. Prepare the journal entry on the books of Pequity to account for the change in the contingent consideration liability for year 1.

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Ar December 31, Year 1 Accounts Receivables Treasury Stock at Cost, 500 shares Investment in Sequity Company Property and Equipment (net) Cost of Goods Sold Selling, General, & Administration 1 Dividends Declared S2,011,000 Dividends Payable Common Stock, $5 par Value Other Contributed Capital Retained Earnings, 1/1 Book Value 116,000 465,000 Fair Value 146,000 507,000 Inventory uipment Pequity 1/1Near 1 $100,000 70,000 220,000 Sequity V1/Year 1 4/1Near 1 11,000 124,000 21,000 229,000 116,000 Pequiy Balance Sheet Cash Accounts Receivables Inventory Investment in Scost Company Property and Equipment Total I/I/Year1 $15,000 115,000 122,000 28,000 595,000 850.000 $1,340,000 S65,000 450,000 S702,000 $169,000 850,000 465,000 1,826,000 $713,000 215,000 156,000 Accounts and Notes Payable Contingent Consideration Dividends Payable Capital Stock, $5 par value Other Contributed Capital Retained Earnings Treasury Stock Total 50,000 50,000 40,000 250,000 241,000 (48,000) 270,000 220,000 700,000 355,00 40,000 900,000 250,000 391,000 315,000 (48,000) $1,340,000 $702,000 $1,826,000 713,000