P 5-8 Consolidated workpapers (downstream sales)

Pop Corporation acquired 100 percent of Son Corporation’s outstanding voting common stock on January 1, 2016, for $660,000 cash. Son’s stockholders’ equity on this date consisted of $300,000 capital stock and $300,000 retained earnings. The difference between the fair value of Son and the underlying equity acquired in Son was allocated $30,000 to Son’s undervalued inventory and the remainder to goodwill.

The undervalued inventory items were sold by Son during 2016.

Pop made sales of $100,000 to Son at a gross profit of $40,000 during 2016; during 2017, Pop made sales of $120,000 to Son at a gross profit of $48,000. One-half the 2016 sales were inventoried by Son at year-end 2016, and one-fourth the 2017 sales were inventoried by Son at year-end 2017.

Son owed Pop $17,000 on account at December 31, 2017.

The separate financial statements of Pop and Son Corporations at and for the year ended December 31, 2017, are summarized as follows:

Pop Son Combined Income and Retained Earnings Statement for the Year Ended December 31, 2017 (in thousands)

Sales $ 800 $400 Income from Son 108 —

Cost of sales (400) (200)

Depreciation expense (110) (40)

Other expenses (192) (60)

Net income 206 100 Beginning retained earnings 606 380 Less: Dividends (100) (50)

Retained earnings December 31, 2017 $ 712 $430 Pop Son Balance Sheet at December 31, 2017 Cash $ 54 $ 37 Receivables—net 90 60 Inventories 100 80 Other assets 70 90 Land 50 50 Buildings—net 200 150 Equipment—net 500 400 Investment in Son 748 —
Total assets $1,812 $867 Accounts payable $ 160 $ 47 Other liabilities 340 90 Common stock, $10 par 600 300 Retained earnings 712 430 Total equities $1,812 $867 REQuIRED: Prepare workpapers to consolidate the financial statements of Pop Corporation and Subsidiary at and for the year ended December 31, 2017.