P8-11 Workpaper (midyear acquisition, preacquisition income and dividends, upstream sale of inventory, downstream sale of inventory item used by subsidiary as plant asset)

Pam Corporation acquired an 85 percent interest in Sun Corporation on August 1, 2016, for $522,750, equal to 85 percent of the underlying equity of Sun on that date.

In August 2016, Sun sold inventory items to Pam for $60,000 at a gross profit of $15,000. Onethird of these items remained in Pam’s inventory at December 31, 2016.

On September 30, 2016, Pam sold an inventory item (equipment) to Sun for $50,000 at a gross profit to Pam of $10,000. When this equipment was placed in service by Sun, it had a five-year remaining useful life and no expected salvage value.

Sun’s dividends were declared in equal amounts on June 15 and December 15, and its income was earned in relatively equal amounts throughout each quarter of the year. Pam applies the equity method, such that its net income is equal to the controlling share of consolidated net income. Financial statements for Pam and Sun are as follows (in thousands):

Pam Sun Combined Income and Retained Earnings Statement for the Year Ended December 31, 2016 Sales $ 910 $400 Income from Sun 7.5 —

Cost of sales (500) (250)

Operating expenses (200) (90)

Net income 217.5 60 Add: Beginning retained earnings 192.5 100 Deduct: Dividends (100) (40)

Retained earnings December 31 $ 310 $120 Balance Sheet at December 31, 2016 Cash $ 33.75 $10 Dividends receivable 17 —

Accounts receivable—net 120 70 Inventories 300 150 Plant assets—net 880 500 Investment in Sun—85% 513.25 —

Total assets $1,864 $730 Accounts payable $ 154 $ 90 Dividends payable — 20 Capital stock 1,400 500 Retained earnings 310 120 Total equities $1,864 $730 REQuIRED: Prepare a consolidation workpaper for the year ended December 31, 2016.

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