P 5-8 Consolidated workpapers (downstream sales)

Pan Corporation acquired 100 percent of Sal Corporations outstanding voting common stock on January 1, 2011, for $660,000 cash. Sals stockholders equity on this date consisted of $300,000 capital stock and $300,000 retained earnings. The difference between the fair value of Sal and the underlying equity acquired in Sal was allocated $30,000 to Sals undervalued inventory and the remainder to goodwill. The undervalued inventory items were sold by Sal during 2011.

Pan made sales of $100,000 to Sal at a gross profit of $40,000 during 2011; during 2012, Pan made sales of $120,000 to Sal at a gross profit of $48,000. One-half the 2011 sales were inventoried by Sal at year-end 2011, and one-fourth the 2012 sales were inventoried by Sal at year-end 2012. Sal owed Pan $17,000 on account at December 31, 2012.

The separate financial statements of Pan and Sal Corporations at and for the year ended December 31, 2012, are summarized as follows:

		Pan		Sal
Combined Income and Retained Earnings Statements for the Year Ended December 31, 2012 (in thousands)
Sales		$ 800		$400
Income from Sal		108
Cost of sales		(400)		(200)
Depreciation expense		(110)		(40)
Other expenses		(192)		(60)
Net income		206		100
Beginning retained earnings		606		380
Less: Dividends		(100)		(50)
Retained earnings December 31, 2012		$ 712		$430
Balance Sheet at December 31, 2012
Cash		$ 54		$ 37
Receivablesnet		90		60
Inventories		100		80
Other assets		70		90
Land		50		50
Buildingsnet		200		150
Equipmentnet		500		400
Investment in Sal		748
Total assets		$1,812		$867
Accounts payable		$ 160		$ 47
Other liabilities		340		90
Common stock, $10 par		600		300
Retained earnings		712		430
Total equities		$1,812		$867

Required:

Prepare workpapers to consolidate the financial statements of Pan Corporation and Subsidiary at and for the year ended December 31, 2012.