Workpapers and financial statements in year of acquisition
Peterson Corporation acquired 70 percent of the outstanding voting stock of Smith Corporation for $91,000 cash on January 1, 2011, when Smith's stockholders' equity was $130,000. All the assets and liabilities of Smith were stated at fair values (equal to book values) when Peterson acquired its 70 percent interest. Financial statements of the two corporations at and for the year ended December 31, 2011, are summarized as follows (in thousands):

Combined Income and Retained Earnings
Statements for the Year Ended December 31

Peterson Smith
Sales $620 $200
Income from Smith 21 0
Cost of Goods Sold -400 -130
Operating expenses -154 -40
Net income $87 $30
Add: Retained earnings January 1 130 22
Deduct: Dividends -60 -20
Retained earnings December 31 $157 $32

Balance Sheet at December 31
Cash $91 $30
Receivables-net 120 60
Inventories 48 40
Plant and equipment-net 240 70
Investment in Smith 98 0
Total assets $597 $200

Accounts payable $60 $36
Other liabilities 40 24
Capital stock, $10 par 300 100
Other paid-in capital 40 8
Retained earnings 157 32
Total equities $597 $200

REQUIRED
1. Prepare consolidation workpapers for Pal Corporation and Subsidiary for 2011.
2. Prepare a consolidated income statement and a consolidated balance sheet for Pal Corporation and Subsidiary.