P8-10 Workpaper (midyear purchase of 10% interest, downstream sales)

Pop Corporation acquired a 70 percent interest in Son Corporation on January 1, 2016, for $420,000 cash, when Son’s equity consisted of $300,000 capital stock and $200,000 retained earnings. On July 1, 2017, Pop acquired an additional 10 percent interest in Son for $67,500, to bring its interest in Son to 80 percent. The financial statements of Pop and Son Corporations at and for the year ended December 31, 2017, are as follows (in thousands):

Pop Son Combined Income and Retained Earnings Statement for the Year Ended December 31 Sales $ 900 $500 Income from Son 38 —

Gain on machinery 40 —

Cost of sales (400) (300)

Depreciation expense (90) (60)

Other expenses (160) (40)

Net income 328 100 Add: Beginning retained earnings 155 250 Less: Dividends (200) (50)

Retained earnings December 31 $ 283 $300 Balance Sheet at December 31 Cash $ 20 $ 80 Accounts receivable 130 30 Dividends receivable 20 —

Inventories 90 70 Other current items 20 80 Land 50 40 Buildings—net 60 105 Machinery—net 100 320 Investment in Son 510 —

Total assets $1,000 $725 Accounts payable $ 177 $ 40 Dividends payable 100 25 Other liabilities 140 60 Capital stock, $10 par 300 300 Retained earnings 283 300 Total equities $1,000 $725 ADDITIONAL INFORMATION 1. The fair value/book value differential from Pop’s two purchases of Son was goodwill.

2. Pop Corporation sold inventory items to Son during 2016 for $60,000, at a gross profit of $10,000. During 2017, Pop’s sales to Son were $48,000, at a gross profit of $8,000. Half of the 2016 intercompany sales were inventoried by Son at year-end 2016, and three-fourths of the 2017 sales remained unsold by Son at year-end 2017. Son owes Pop $25,000 from 2017 purchases.

3. At year-end 2016, Son purchased land from Pop for $20,000. The cost of this land to Pop was $12,000.

4. Pop sold machinery with a book value of $40,000 to Son for $80,000 on July 8, 2017. The machinery had a five-year useful life at that time. Son uses straight-line depreciation without considering salvage value on the machinery.

5. Pop uses a one-line consolidation in accounting for Son. Both Pop and Son Corporations declared dividends for 2017 in equal amounts in June and December.

REQuIRED: Prepare a workpaper to consolidate the financial statements of Pop Corporation and Subsidiary for the year ended December 31, 2017.

Consolidations—Changes in Ownership Interests 299