P 6-7 Workpaper (downstream and upstream sales) Pot Corporation acquired all the outstanding stock of Ski Corporation on April 1, 2011, for $15,000,000, when Ski's stockholders' equity consisted of $5,000,000 capital stock and $2,000,000 retained earnings. The price reected a $500,000 undervaluation of Ski's inventory (sold in 2011) and a $3,500,000 undervaluation of Ski's buildings (remaining useful life seven years from April 1, 2011). During 2012, Ski sold land that cost $1,000,000 to Pot for $1,500,000. Pot resold the land for $2,200,000 during 2015. Pot sells inventory items to Ski on a regular basis, as follows (in thousands): Percentage Percentage Unsold by Ski Unpaid by Ski Sales to Ski Cost to Pet at Year End at Year End 2011 $ 500 $300 0% 0% 2012 1,000 600 30 50 2013 1,200 720 18 30 2014 1,000 600 25 20 2015 1,500 900 20 20 Ski sold equipment with a book value of $800,000 to Pot on January 3, 2015, for $1,600,000. This equipment had a remaining useful life of four years at the time of sale. Pot uses the equity method to account for its investment in Ski. The nancial statements for Pot and Ski are summarized as follows (in thousands): Pot Ski Combined Income and Retained Earnings Statement for the Year Ended December 31, 2015 Sales $26,000 $1 1,000 Gain on land 700 Gain on equipment 800 Income from Ski 1,380 Cost of sales (15,000) (5,000) Depreciation expense (3,700) (2,000) Other expenses 54,280) (2,800) Net income 5,100 2,000 Add: Beginning retained earnings 12,375 4,000 Deduct: Dividends 5 3,0001 5 1,000 1 Retained earnings December 31 $14,475 $ 5,000 Ifakmce Sheet at December 31, 2015