P6-4 Workpaper (downstream sales, two years)

Pam Corporation acquired a 90 percent interest in Sun Corporation on January 1, 2016, for $2,700,000, at which time Sun’s capital stock and retained earnings were $1,500,000 and $900,000, respectively. The fair value cost/book value differential is due to a patent with a 10-year amortization period. Financial statements for Pam and Sun for 2017 are as follows (in thousands):

Pam Sun Combined Income and Retained Earnings Statement for the Year Ended December 31, 2017 Sales $ 4,500 $ 1,900 Income from Sun 346 —

Gain on land 50 —

Cost of sales (2,000) (1,000)

Operating expenses (1,130) (400)

Net income 1,766 500 Add: Retained earnings January 1 2,000 1,200 Less: Dividends (1,500) (200)

Retained earnings, December 31 $ 2,266 $ 1,500 Pam Sun Balance Sheet at December 31, 2017 Cash $ 1,364 $ 140 Accounts receivable 1,800 1,000 Dividends receivable 180 —
Inventories 600 360 Land 1,000 300 Buildings—net 2,800 800 Machinery—net 3,300 1,400 Investment in Sun 2,922 —
$13,966 $ 4,000 Accounts payable $ 2,000 $ 500 Dividends payable 300 200 Other liabilities 1,400 300 Capital stock 8,000 1,500 Retained earnings 2,266 1,500 $13,966 $ 4,000 ADDITIONAL INFORMATION 1. Pam sold inventory to Sun for $600,000 during 2016 and $720,000 during 2017; Sun’s inventories at December 31, 2016 and 2017, included unrealized profits of $100,000 and $120,000, respectively.
2. On July 1, 2016, Pam sold machinery with a book value of $280,000 to Sun for $350,000. The machinery had a useful life of 3.5 years at the time of intercompany sale, and straight-line depreciation is used.
3. During 2017, Pam sold land with a book value of $150,000 to Sun for $200,000.
4. Pam’s accounts receivable on December 31, 2017, includes $100,000 due from Sun.
5. Pam uses the equity method for its 90 percent interest in Sun.
REQuIRED: Prepare a consolidation workpaper for Pam and Subsidiary for the year ended December 31, 2017.