P7-5

[Based on AICPA] Computations (constructive retirement of subsidiary bonds)

Selected amounts from the separate unconsolidated financial statements of Pam Corporation and its 90 percent–owned subsidiary, Sun Company, at December 31, 2016, are as follows (in thousands).

Pam Sun Selected Income Statement Amounts Sales $710 $530 Cost of goods sold 490 370 Gain on sale of equipment — 21 Earnings from investment in subsidiary 63 —

Interest expense — 16 Depreciation 25 20 Selected Balance Sheet Amounts Cash $ 50 $ 15 Inventories 229 150 Equipment 440 360 Accumulated depreciation (200) (120)

Investment in Sun 189 —

Investment in bonds 91 —

Bonds payable — (200)

Common stock (100) (10)

Additional paid-in capital (250) (40)

Retained earnings (402) (140)

Selected Statement of Retained Earnings Amounts Beginning balance December 31, 2015 $272 $100 Net income 212 70 Dividends paid 80 30 ADDITIONAL INFORMATION 1. On January 2, 2016, Pam purchased 90 percent of Sun’s 100,000 outstanding common stock for cash of

$153,000. On that date, Sun’s stockholders’ equity equaled $150,000 and the fair values of Sun’s assets and liabilities equaled their carrying amounts. Pam correctly accounted for the combination as an acquisition.

The difference between fair value and book value was due to goodwill.

2. On September 4, 2016, Sun paid cash dividends of $30,000.

3. On December 31, 2016, Pam recorded its equity in Sun’s earnings.

4. On January 3, 2016, Sun sold equipment with an original cost of $30,000 and a carrying value of $15,000 to Pam for $36,000. The equipment had a remaining life of three years and was depreciated using the straight-line method by both companies.

268 CHAPTER 7 5. During 2016, Sun sold merchandise to Pam for $60,000, which included a profit of $20,000. At December 31, 2016, half of this merchandise remained in Pam’s inventory.

6. On December 31, 2016, Pam paid $91,000 to purchase half of the outstanding bonds issued by Sun. The bonds mature on December 31, 2022, and were originally issued at par. These bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately before Pam’s purchase of the bonds.

REQuIRED:Determine the amounts at which the following items will appear in the consolidated financial statements of Pam Corporation and Subsidiary for the year ended December 31, 2016.

1. Cash 2. Equipment less accumulated depreciation 3. Investment in Sun 4. Bonds payable 5. Common stock 6. Beginning retained earnings 7. Dividends declared 8. Gain on retirement of bonds 9. Cost of goods sold 10. Interest expense 11. Depreciation expense