P6-6 Workpaper (downstream and upstream sales)

Pam Corporation acquired all the outstanding stock of Sun Corporation on April 1, 2016, for $15,000,000, when Sun’s stockholders’ equity consisted of $5,000,000 capital stock and $2,000,000 retained earnings.

The price reflected a $500,000 undervaluation of Sun’s inventory (sold in 2016) and a $3,500,000 undervaluation of Sun’s buildings (remaining useful life seven years from April 1, 2016).

During 2017, Sun sold land that cost $1,000,000 to Pam for $1,500,000. Pam resold the land for $2,200,000 during 2020.

Pam sells inventory items to Sun on a regular basis, as follows (in thousands):

Sales to Sun Cost to Pam Percentage Unsold by Sun at Year End Percentage Unpaid by Sun at Year End 2016 $ 500 $300 0% 0%

2017 1,000 600 30 50 2018 1,200 720 18 30 2019 1,000 600 25 20 2020 1,500 900 20 20 Sun sold equipment with a book value of $800,000 to Pam on January 3, 2020, for $1,600,000.

This equipment had a remaining useful life of four years at the time of sale.

Pam uses the equity method to account for its investment in Sun. The financial statements for Pam and Sun are summarized as follows (in thousands):

Pam Sun Combined Income and Retained Earnings Statement for the Year Ended December 31, 2020 Sales $26,000 $11,000 Gain on land 700 —

Gain on equipment — 800 Income from Sun 1,380 —

Cost of sales (15,000) (5,000)

Depreciation expense (3,700) (2,000)

Other expenses (4,280) (2,800)

Net income 5,100 2,000 Add: Beginning retained earnings 12,375 4,000 Deduct: Dividends (3,000) (1,000)

Retained earnings December 31 $14,475 $ 5,000 Balance Sheet at December 31, 2020 Cash $ 1,170 $ 500 Accounts receivable—net 2,000 1,500 Inventories 5,000 2,000 Land 4,000 1,000 Buildings—net 15,000 4,000 Equipment—net 10,000 4,000 Investment in Sun 14,405 —

Total assets $51,575 $13,000 Pam Sun Accounts payable $ 4,100 $ 1,000 Other liabilities 7,000 2,000 Capital stock 26,000 5,000 Retained earnings 14,475 5,000 Total equities $51,575 $13,000 REQuIRED:Prepare a consolidation workpaper for Pam Corporation and Subsidiary for the year ended December 31, 2020.