P6-3 Workpaper (downstream sale and intercompany receivable/payable)

Arnab Corporation acquired an 80 percent interest in Bitt Corporation on January 1, 2016, for $3,000,000 in cash. Bitt’s common stock and retained earnings on this date were at $2,500,000 and $500,000, respectively.

The book value of Bitt’s net assets equals fair value.

The financial statements of Arnab and Bitt at and for the year ended December 31, 2017, are summarized as follows (in thousands):

Arnab Bitt Combined Income and Retained Earnings Statement for the Year Ended December 31, 2017 Sales $3,000 $500 Income from Bitt 51 —
Gain on equipment 10 —
Cost of sales 1,200 300 Operating expense 400 120 Net income 1,461 $80 Add: Beginning retained earnings 2,300 726.25 Less: Dividends 200 20 Retained earnings December 31 $3,561 $786.25 Balance Sheet at December 31, 2017 Cash $100 $25 Accounts receivable 520 30 Dividends receivable 16 —
Inventories 1,250 1076.25 Land 2,500 750 Buildings–net 1,250 800 Equipment–net 3,114 705 Investment in Bitt 3,161 —
Total assets 11,911 3,386.25 Accounts payable 200 30 Dividends payable — 20 Other liabilities 150 50 Common stock, $10 par 8,000 2,500 Retained earnings 3,561 786.25 Total equities $11,911 $3,386.25 During 2016, Arnab sold land to Bitt with a book value of $100,000 for $150,000. On January 1, 2017, Arnab sold equipment with a five-year remaining useful life and a book value of $50,000 to Bitt for $60,000 on January 1, 2017. Arnab also sold merchandise to Bitt for $45,000 during 2016 and for $50,000 during 2017. Bitt’s inventories at December 31, 2016, and December 31, 2017, included unrealized profits of $5,000 and $10,000, respectively.
Arnab’s accounts receivable on December 31, 2017, included $5,000 from Bitt, and all of Arnab’s dividends receivable on December 31, 2017, are from Bitt.
REQuIRED: Prepare a consolidation workpaper for Arnab Corporation and Subsidiary for the year ended December 31, 2017.