P4-13

[Appendix A] Workpapers for two successive years (equity method misapplied in second year)

Comparative adjusted trial balances for Pam Corporation and Sun Corporation are given here. Pam Corporation acquired an 80 percent interest in Sun Corporation on January 1, 2016, for $80,000 cash. Except for inventory items that were undervalued by $1,000 and equipment that was undervalued by $4,000, all of Sun’s identifiable assets and liabilities were stated at their fair values on December 31, 2015. The remaining excess was assigned to previously unrecorded intangibles, which had a 40-year remaining life.

Sun sold the undervalued inventory items during 2016 but continues to own the equipment, which had a four-year remaining useful life as of December 31, 2015. (All amounts are in thousands.)

December 31, 2015 December 31, 2016 December 31, 2017 Pam Sun Pam Sun Pam Sun Cash $100 $ 30 $ 24.7 $ 15 $ 26.7 $ 20 Trade receivables—net 30 15 25 20 45 30 Dividends receivable — — 4 — 4 —

Inventories 50 20 40 30 40 30 Plant and equipment—net 90 60 100 55 95 60 Investment in Sun — — 86.3 — 94.3 —

Cost of sales 100 40 105 35 110 35 Operating expenses 20 30 35 30 30 35 Dividends 10 5 10 5 15 10

$400 $200 $430 $190 $460 $220 Accounts payable $ 30 $ 35 $ 20.7 $ 15 $ 17.7 $ 25 Dividends payable 10 — 9 5 6 5 Capital stock 100 40 100 40 100 40 Other paid-in capital 60 20 60 20 60 20 Retained earnings 50 25 70 30 90.3 40 Sales 150 80 160 80 170 90 Income from Sun — — 10.3 — 16 —

$400 $200 $430 $190 $460 $220 REQuIRED: Prepare consolidation workpapers for Pam Corporation and Subsidiary for 2016 and 2017 using the financial statement approach. (Hint: Pam Corporation’s accountant applied the equity method correctly for 2016 but misapplied the equity method for 2017.)