Problem 3 Parch Corporation acquired a 90% interest in Sarg Corporation's outstanding voting common stock on January 1, 2003, for $630,000 cash. The stockholders' equity of Sarg on this date consisted of $500,000 capital stock and $200,000 retained earnings. The separate financial statements of Parch and Sarg Corporations at and for the year ended December 31, 2003, summarized as follows (in thousands): Parch Sarg Combined Income and Retained Earnings Statement for the year ended December 31, 2003 $700 $500 Sales Income from Sarg Gain on land Gain on equipment Cost of sales (300) Depreciation expenses Other expenses Net income (90) (200) 200 (300) (35) (65) 110 600 200 Beginning retained earnings Dividends Retained earnings December 31, 2003 (100) $700 (50) $260 3 of 4 Balance Sheet at December 31, 2003 Cash Accounts receivables - net $35 $30 Inventories Other current items Land Buildings - net Equipment - net Investment in Sarg 150 400 500 655 $1,700 $880 $50 Accounts payable $160 Other liabilities 340 500 700 Capital stock, $10 par Retained earnings 500 260 $1,700 $880 During 2003, Parch made sales of $50,000 to Sarg at gross profit of $15,000. One third of these sales were inventories by Sarg at year end. Sarg owed Parch $100,000 on open account at December 31, 2003. Sarg sold land that cost $20,000 for Parch for $30,000 on July 1, 2003, Parch still owns the land. On January 1, 2003, Parch sold equipment with a book value of $20,000 and a remaining useful life of four years to Sarg for $40,000. Sarg uses straight-line depreciation and assumes no residual value on this equipment. Required: Prepare consolidation working papers for Parch Corporation and Subsidiary for the year ended December 31, 2003