On January 4, 20X7, Pradeesh Corp. acquired 100% of the outstanding common shares of Serena Inc. by a share- for- share exchange of its own shares valued at $ 1,000,000 (P3– 8). The statements of financial position of both companies just prior to the share exchange are shown below. Serena had patents, not shown on the SFP that had an estimated fair value of $ 200,000 and an estimated remaining productive life of four years. Serena’s buildings and equipment had an estimated fair value $ 300,000 in excess of carrying value, and the deferred charges were assumed to have a fair value of zero. Serena’s buildings and equipment are being depreciated on the straight- line basis and have a remaining useful life of 10 years. The deferred charges are being amortized over three years.

During 20X7, the year following the acquisition, Serena borrowed $ 100,000 from Pradeesh; $ 40,000 was repaid and $ 60,000 is still outstanding at year- end. No interest is being charged on the loan. Through the year, Serena sold goods to Pradeesh totaling $ 400,000. Serena’s gross margin is 40% of selling price, and its tax rate is 25%. Three- quarters of these goods were resold by Pradeesh to its customers for $ 450,000. Dividend declarations amounted to $ 80,000 by Pradeesh and $ 50,000 by Serena. There were no other intercompany transactions. The year- end 20X7 SFPs and SCIs for Pradeesh and Serena are shown below.

Required

a. How would the SCI and SFP for Pradeesh Corp. differs from those shown below if Pradeesh reported its investment in Serena on the equity basis? Show all calculations.

b. Prepare a complete set of consolidated financial statements for Pradeesh Corp. for 20X7.

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Statements of Financial Position Cash Accounts and other receivables Inventories Buildings and equipment Accumulated depreciation Land Investment in Serena (at cost) Other investments Deferred charges December 31, 20X7 Pradeesh 50,000 240,000 150,000 1,300,000 (570,000) Serena 25,000 90,000 80,000 900,000 (445,000) 60,000 1,000,000 0,000 30,000 80,000 $820,000 2,240,000 150,000 Accounts and other payables Bonds payable Deferred income taxes Common shares Retained eamings 70,000 1,600,000 420,000 2,240,000 $180,000 170,000 45,000 150,000 275,000 6820,000 Statements of Comprehensive Income Year Ended December 31, 20X7 Sales Dividend income Pradeesh $1,500,000 50,000 Serena $900,000 1,550,00 Cost of sales Depreciation expense Amortization expense Income tax expense Other expenses 900,000 540,000 45,000 40,000 25,000 175,000 825,000 75,000 1,000,000 70,000 50,000 230,000 1,350,000 200,000 Net income Statements of Changes in Equity-Retained Earnings Section Year Ended December 31, 20X7 Retained eamings, December 31, 20X6 Net income Dividends declared Retained eamings, December 31, 20X7 Pradeesh 300,000 200,000 (80,000) 420,000 Serena 250,000 75,000 (50,000) 275,000