Workpaper (mid year purchase of 10% interest, downstream sales)
Pam Corporation acquired a 70 percent interest in Sam Corporation on January 1, 2011, for $420,000 cash, when Sam’s equity of Sam consisted of $300,000 capital stock and $200,000 retained earnings.
On July 1, 2012, Pam acquired an additional 10 percent interest in Sam for $67,500, to bring its interest in Sam to 80 percent. The financial statements of Pam and Sam Corporations at and for the year ended December 31, 2012, are as follows (in thousands):
|
Pam |
Sam |
|
|
Combined Income and Retained Earnings Statement |
||
|
for the Year Ended December 31 |
||
|
Sales |
$ 900 |
$500 |
|
Income from Sam |
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 Sam |
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 Pam’s two purchases of Sam was goodwill.
2. Pam Corporation sold inventory items to Sam during 2011 for $60,000, at a gross profit of $10,000. During 2012, Pam’s sales to Sam were $48,000, at a gross profit of $8,000. Half of the 2011 intercompany sales were inventoried by Sam at year end 2011, and three fourths of the 2012 sales remained unsold by Sam at year end 2012. Sam owes Pam $25,000 from 2012 purchases.
3. At year end 2011, Sam purchased land from Pam for $20,000. The cost of this land to Pam was $12,000.
4. Pam sold machinery with a book value of $40,000 to Sam for $80,000 on July 8, 2012. The machinery had a five year useful life at that time. Sam uses straight line depreciation without considering salvage value on the machinery.
5. Pam uses a one line consolidation in accounting for Sam. Both Pam and Sam Corporations declared dividends for 2012 in equal amounts in June and December.
REQUIRED: Prepare a workpaper to consolidate the financial statements of Pam Corporation and Subsidiary for the year ended December 31, 2012.